After several attempts, German chemical behemoth, Bayer AG (BAYRY Quick QuoteBAYRY - Free Report) has succeeded in acquiring agribusiness giant Monsanto Company in the biggest merger deal of this year. If implemented, the combined company will emerge as one of the major players in the seeds and pesticides market. However, a series of regulatory hurdles await the deal.

Bayer-Monsanto Deal in Detail

Monsanto agreed to be acquired by Bayer in an all-cash deal worth $66 billion or $128 per share, which is a 21% premium from Monsanto’s closing price on Tuesday. This was Bayer’s fourth attempt to acquire the company. The German company had offered $122 per share for the buyout in May 2016. The proposal was rejected by Monsanto on grounds of being “insultingly low”. Bayer gradually started sweetening its bid, raising it to $125 per share in July and further to $127.50 in early September (read: ETFs to Watch on Monsanto Buyout Offer). 

With the acquisition, Bayer seeks to hold greater share of the seeds and pesticides market. The combined company will own more than one-fourth share of the seeds and pesticides market. Though the deal is expected to be closed by the end of next year, in the event of its failure due to regulatory issues, the German company will have to pay $2 billion to Monsanto as break-up fee. The deal is expected to have a positive impact on Bayer’s earnings in the first year following its closure while by the third year earnings are expected to get a double-digit percentage boost.

Regulatory Issues a Concern

The threat of market concentration following the merger will lead to increased scrutiny by regulatory agencies. For an instance, EU Antitrust Chief Margrethe Vestager signaled that the deal will be closely examined by the agency and they will evaluate its impact on the crop market. The agency is already investigating the merger deal between The Dow Chemical Company (DOW Quick QuoteDOW - Free Report) and E. I. du Pont de Nemours and Company (DD Quick QuoteDD - Free Report) (read: Material ETFs in Focus on Dow Chemical & DuPont Q2 Earnings).

Separately, Agrium Inc. and Potash Corporation of Saskatchewan Inc. recently agreed to get merged, which has further raised concerns over market concentration. Given the increasing instances of mergers, U.S. Senator Charles Grassley plans to hold a hearing on Sep 20 to discuss the impacts of these deals on the global seeds and pesticides market. Grassley said: “In most instances when you have less competition, prices go up, and consumers pay more.”

ETFs in Focus

Despite these concerns, both the companies sound confident about overcoming regulatory barriers. Werner Baumann, CEO of Bayer said: “some initial contacts with regulatory agencies describing what this combination would be about... We have so far received encouraging feedback but nothing beyond that.” Regarding regulatory issues, Monsanto’s CEO Hugh Grant said that “We feel quite good.”

Hence, we have highlighted four ETFs with significant exposure to Monsanto, the performances of which are expected to be impacted as the deal progresses (see all Materials ETFs here).

iShares MSCI Global Agriculture Producers (VEGI Quick QuoteVEGI - Free Report)

This fund provides global exposure to 122 companies by tracking the MSCI ACWI Select Agriculture Producers Investable Market Index. Of these, Monsanto occupies the top position with a 13.96% allocation. On a regional basis, American firms dominate the fund’s holding with 45.7% of total assets, followed by a double-digit exposure to Switzerland. From a sector look, materials takes the largest share at 47.6%, closely followed by food beverage & tobacco (21%) and capital goods (17.1%). The ETF is less popular and illiquid with $27.2 million in AUM and around 8,000 shares in average daily volume. The ETF charges 39 bps in fees per year from investors.

Materials Select Sector SPDR ETF (XLB Quick QuoteXLB - Free Report)

This is the most popular material ETF that follows the Materials Select Sector Index. This fund manages about $2.6 billion in its asset base and trades in heavy volume of around 5.2 million shares. The ETF charges 14 bps in fees per year from investors. In total, the fund holds about 29 securities in its basket with MON taking the third spot with an 8.7% allocation. In terms of industrial exposure, chemicals dominates the portfolio with 70.3% share while containers & packaging and metals & mining round off the top three positions. The fund currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares US Basic Materials (IYM Quick QuoteIYM - Free Report)

This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 51 stocks in its basket. The fund has amassed $577 million in its asset base and charges 43 bps in fees and expenses. Volume is good as it exchanges around 153,000 shares a day. Monsanto occupies the third position in the basket with 8.8% share. The product is heavily skewed toward the chemicals segment, as it makes up for nearly 70% of the portfolio while industrial gases receives double-digit allocation. The fund currently has a Zacks ETF Rank #3 with a High risk outlook (read: Will Weak Q2 at Monsanto Drag Agriculture ETFs?).

VanEck Vectors Agribusiness ETF (MOO Quick QuoteMOO - Free Report)

This fund is a popular and liquid choice in the space with AUM of about $839.8 million and average daily volume of nearly 120,000 shares. It tracks the MVIS Global Agribusiness Index and charges 55 bps in annual fees. In total, the fund holds 52 securities in its basket with MON occupying the second spot at 7.8% of total assets. From a sector look, materials takes the largest share at 39.5%, closely followed by consumer staples (30.6%) and industrials (16.9%). In terms of country allocation, more than half of the portfolio goes to U.S. firms while Canada, Switzerland and Japan get a decent exposure of around 7% each.

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