Competition Bureau statement regarding Bayer AG’s acquisition of Monsanto Company

On May 30, 2018, the Commissioner of Competition (the Commissioner) entered into a consent agreement with Bayer AG (Bayer) related to Bayer's proposed acquisition of Monsanto Company (Monsanto). This consent agreement is necessary to remedy the likely substantial lessening and prevention of competition that would have resulted from the transaction. The agreement represents the conclusion of an extensive review by the Bureau that assessed the likely impact of Bayer's proposed acquisition of Monsanto across a range of inputs to agricultural production including: canola, corn, soybean and wheat seeds and traits; seed treatments and agricultural biologicals; vegetable seeds; and digital agriculture products. Furthermore, the Bureau also closely analyzed the likely conglomerate effects of the proposed transaction resulting from the combination of the broad product portfolios and sophisticated R&D capabilities of the merging parties.

The consent agreement entered into with Bayer addresses the Commissioner's finding that the proposed transaction was likely to substantially lessen and prevent competition in Canada with respect to the supply of canola seeds and traits, soybean seeds and traits, nematicidal seed treatments, and carrot seeds. The Bureau is also satisfied that the scope of the remedy package is sufficiently broad in terms of both products and R&D assets to address the concerns of certain stakeholders that Bayer and Monsanto would have been able to leverage the combined strength of their organizations to the detriment of competition.

In carrying out its investigation the Bureau consulted extensively with, and obtained information from, a wide range of stakeholders including growers, grower organizations, competitors and government departments. It also relied heavily on the analysis of documents and data obtained from the parties and third parties. The Bureau worked in cooperation with its international enforcement partners including the United States Department of Justice and the European Commission Directorate General for Competition.

Given the expansive nature of the Bureau's investigations this position statement will not cover all aspects of the Bureau's analysis but will rather focus on the market that was the Bureau's primary area of attention: the supply of canola seeds and traits.

The Parties and the Proposed Transaction

Bayer is a publicly-traded global pharmaceutical, consumer health, animal health and crop science company headquartered in Leverkusen, Germany. Monsanto is a publicly-traded global provider of agricultural products headquartered in St. Louis, Missouri.

On September 14, 2016, Bayer and Monsanto signed a definitive agreement under which Bayer proposed to acquire Monsanto for $128 USD per share. The offer price valued Monsanto at $66 billion USD.

Canola in Canada

Canola is a crop of strategic importance to the Canadian economy and is grown on over 20 million acres of Canadian land. Due to increasing demand as a vegetable oil, high-protein animal feed and biofuel feedstock, canola has, since 2015, surpassed wheat as Canada's highest acreage crop, and according to a 2016 report commissioned by the Canola Council of Canada contributes $26.7 billion to the Canadian economy. It is an export to key trading partners such as the United States, Mexico, China, Japan, India and the European Union.

Canola seeds are supplied by seed companies that invest heavily in modern breeding techniques to develop varieties that are able to deliver higher yields, improved drought and disease resistance, and better structural properties to facilitate harvesting. Bayer, Monsanto and Corteva Agriscience are the three leading firms in the supply of canola seeds in Canada. Other firms supplying canola seeds include Brett Young, Canterra, Cargill and Nutrien.

In the pursuit of increased yields, certain agricultural companies have also developed herbicide tolerance traits for canola—specific modifications to the genetic structure of the canola plant that render it tolerant to the application of a particular herbicide. The fundamental design principle behind such traits is to provide the canola plant with resistance to a herbicide that will kill all vegetation but for the canola plant itself. These herbicide tolerance traits are introduced into canola through either genetic modification or mutation and allow growers to spray their canola crop with a particular herbicide for systematic weed control throughout the growing season.

Since 1995, nearly all canola varieties sold in Canada have contained one of three herbicide tolerance traits:

  1. Bayer's LibertyLink trait which is contained in all canola varieties sold by Bayer and which confers tolerance to the active ingredient glufosinate ammonium;
  2. Monsanto's Roundup Ready trait which confers tolerance to the active ingredient glyphosate and which Monsanto uses in all its own canola varieties but also broadly licenses to competitors including Corteva Agriscience, Brett Young, Canterra and Nutrien; and
  3. BASF's Clearfield trait which is contained in certain canola varieties of Brett Young, Canterra, Corteva Agriscience, and Nutrien and which confers tolerance to a family of chemicals known as imidazolinones.

Approximately 55% of canola seeds sold in Canada contain Bayer's LibertyLink trait, approximately 40% contain Monsanto's Roundup Ready trait, while approximately 5% contain BASF's Clearfield trait. Bayer and BASF are the only firms selling a herbicide compatible with their respective traits while Monsanto is the leading seller of glyphosate in Canada.     

Competitive Harm

Based on its analysis, the Bureau concluded that Bayer's proposed acquisition of Monsanto would likely substantially lessen and prevent competition in the supply of canola seeds and traits because:

  1. Direct competition and innovation rivalry between Bayer and Monsanto in the supply of canola seeds would be eliminated. The effects of this lost rivalry would likely result in a combination of increased prices for growers for both canola seeds and their compatible herbicides, as well as a reduction in the scope and rate of innovative activity directed towards the development of specific canola varieties with better yields and improved drought and disease resistance; and
  2. The merged entity would likely have an incentive to significantly increase royalty rates to competing seed companies for use of the Roundup Ready trait with a view to raising competitors' costs and reducing their competitive vigor.

Quantification

In coming to the conclusions above, and consistent with its ongoing commitment to the advancement of modern analytical techniques, the Bureau relied heavily on merger simulation techniques not only to measure the likely competitive effects of the proposed transaction but also in designing the resulting remedies. In particular, the Bureau relied on an economic model of the canola seed market that incorporated key institutional details from the market including:

  • growers maximizing their profits through the choice of canola seed and compatible herbicide;
  • canola seed and herbicide companies maximizing their profits through the choice of prices for their respective canola varieties and canola herbicides;
  • herbicide tolerance trait owners maximizing their profits by bargaining with seed companies over trait access;
  • quality differences among canola varieties and canola herbicides;
  • complementarity between canola seeds and canola herbicides, including restrictions on which herbicides are chemically compatible with a particular herbicide tolerance trait;
  • potential entry by generic herbicide manufacturers; and
  • crop rotation options for growers.

Drawing on data from market participants and data available publicly, the Bureau used the model to simulate the price and welfare effects of the proposed transaction as well as various potential remedy configurations.

Remedy

Given the complexity of the parties' canola businesses and the extent to which the commercial viability of those businesses was tied to a broader set of assets than those used exclusively for canola, it was particularly important to the Bureau that the remedy preserve, to a very high degree, the integrity of those businesses including their broader infrastructures. To that end the consent agreement requires Bayer to divest to a purchaser acceptable to the Commissioner the company's canola seeds and traits business including its:

  • existing and pipeline canola seed products;
  • library of canola germplasm (including its brassica rapa, brassica napus and canola-quality brassica juncea germplasm outside of India);
  • canola traits (including the LibertyLink herbicide tolerance trait and Bayer's pod shatter trait technology) in addition to its canola trait development programmes;
  • canola breeding and research facility in Saskatoon, Saskatchewan;
  • canola seed production and processing complex in Lethbridge, Alberta;
  • seed trait research facilities in Morrisville, North Carolina, Astene, Belgium and Ghent, Belgium;
  • contra-season canola seed production, processing and breeding facilities located in Australia;
  • all research and development activities related to canola and canola-quality brassica juncea carried on outside of India;
  • glufosinate-ammonium business encompassing the Liberty herbicide, five global production facilities, and all glufosinate-ammonium research and development activities;
  • business related to the Centurion and Select herbicides and the Amigo adjuvant in Canada; and
  • digital farming business in Canada which develops and commercializes data-based decision making tools for growers.

Furthermore, in order to address the Bureau's finding that the proposed transaction was likely to substantially lessen and prevent competition in the supply of soybean seeds and traits, nematicidal seed treatments, and carrot seeds Bayer has also agreed under the consent agreement to divest its:

  • soybean seeds and traits business including its interest in the Balance GT Soybean Performance System;
  • carrot seeds business; and
  • seed treatment business related to the nematicidal products VOTiVO and ILeVO.

Bayer has proposed BASF SE (BASF) as the purchaser of the divestiture assets under the consent agreement. The Bureau continues to review the suitability of BASF as proposed purchaser.

The Commissioner is satisfied that the consent agreement with Bayer addresses the competitive issues arising from the transaction.

This publication is not a legal document. The Bureau's findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau's assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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