Bayer may merge animal health unit with Elanco; report

Bayer has delayed a planned sale of its animal health unit to private equity interests in order to explore a merger with US firm Elanco, claims Reuters.

Citing three separate anonymous sources, the news agency says the two companies are already working with banks to ensure any merger would secure regulatory approvals. However it also suggests Elanco may not have the cash needed to complete the deal.

Elanco – formerly part of Eli Lilly before being spun off last year – is the fourth-largest animal health company and adding Bayer’s fifth-ranked business would create an industry giant to challenge rivals like Pfizer’s Zoetis, Boehringer Ingelheim and Merck & Co.

Elanco is weighed down with debt that it inherited after separating from Lilly, however, it ended last year with an exposure of around $2.5 billion, so Bayer would likely have to keep a stake in the merged company to secure a deal.

A spokesman for Bayer told Reuters that “after the strategic review of the possibilities, the main focus is on a sale”, although he said the company will “consider all value-maximising options.”

Investors have been calling for Bayer to shed the animal health business for some time to narrow its focus on higher-margin operations like human pharmaceuticals and raise cash in the wake of its $63 billion takeover of Monsanto.

Buying Monsanto has exposed Bayer to potential liabilities in legal actions claiming a cancer link with Monsanto’s Roundup weedkiller, with judgments against the company running at a tally of around $2.4 billion at last count.

After earlier denials, Bayer confirmed last November it would sell it or might consider a spinoff as part of a restructuring of its business, which also involved the divestment of some consumer brands and a cut in its headcount of around 12,000 workers.

That was followed by reports that it was entertaining bids for the division from private equity firms, with KKR, CVC, Cinven/Permira and Blackstone among those rumoured to be interested in the business.

At the time it was suggested that a sale could raise up to €8 billion, although analysts suggested that a private equity sale would only go through at a knock-down price. Lilly considered a private equity sale for Elanco, but eventually opted for a spinout and stock market listing instead.