Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the announced transaction to acquire significant parts of Bayer's seed and non-selective herbicide businesses. Analysts, investors, and also journalists were invited to join. On the call with me today are Kurt Bock, Chairman of the Board of Executive Directors of BASF SE, Saori Dubourg, Member of the Board of Executive Directors and responsible for the Agricultural Solutions segment, and Hans-Ulrich Engel, BASF Chief Financial Officer. We will begin with a presentation by Kurt Bock and Saori Dubourg. Following the presentation, Kurt, Saori and Hans will be happy to answer your questions. Please understand that we will not give any updates on BASF's Q3 results before our reporting on October 24. Your questions in today's call should therefore be focused on the announced transaction.
Please be aware that we already posted the slides on the transaction website, basf.com, slash grow with us. With this, I would like to hand things over to Kurt.
Yeah. Thank you, Steffi, and welcome also from my side. It's a pleasure to talk about this acquisition, this pending acquisition project. First, I would like to talk briefly about the current situation with regard to the TDI situation. You are aware, and we also got questions from our analysts and investors. You are aware that we had off-spec material in the market and that caused quite some concern. Clearly, we are very sorry about the uncertainty BASF has caused for our direct customers and for the possible impact on consumers through this off-spec TDI, which has a higher content of dichlorobenzene than is reasonable from our point of view. First and most importantly, there is no health risk for consumers based on all the tests which we have conducted so far.
We saw it as our responsibility to inform our customers as a precautionary measure as soon as possible when we found the contamination. Clearly, and that is something we are very serious about, we will review the process and check how to improve, especially in light of a relatively complex supply chain, namely BASF, the raw material, then the foamers producing foam blocks, then the mattress producers, and finally the retail, and then consumers. As a precautionary measure, BASF is taking back all material which is with our customers. Clean it or if already foamed, we'll dispose of it. This is about two-thirds of the 7,500 tons of production which was off-spec. We will work closely with mattress producers to verify our test results and to support them in their communication with customers and consumers. This is also supported by our hotline.
Again, we do everything to help our customers and consumers. BASF has caused the problem, and we will resolve it. With that, I propose that we will now continue with the initial reason for this call, which is the pending acquisitions of a major part of the seed business of Bayer and also some herbicide business from Bayer. I have to go through a couple of slides, and since you have this on your computer, I will always mention which slide I'm talking about. Please go to slide three of the presentation we published this morning. We reached an agreement with Bayer to acquire significant parts of their seed and non-selective herbicide businesses. Bayer intends to divest these assets in the context of its planned acquisition of Monsanto.
For BASF, this is an excellent opportunity to enter the seed market and to add high quality and fully enabled seed businesses for canola, oil seed rape, soybean, and cotton to our portfolio. Furthermore, the transaction allows us to complement our herbicide business with glufosinate-ammonium based non-selective herbicides. Overall, this will expand our offering to cater to farmers' needs globally. The businesses show high growth and strong profitability. We identified further significant top-line growth potential based on the complementary portfolios, including the relevant R&D capabilities. The all-cash purchase price is EUR 5.9 billion. Based on an EBITDA of EUR 385 million in 2016, the EBITDA multiple of the transaction is around 15x. Please keep in mind that the transaction will be an asset deal. Thus, the multiple is slightly higher than in a common share deal.
We will finance the transaction through a combination of cash on hand, commercial papers, and bonds. We expect the transaction to be cash EPS accretive in the first full fiscal year and EPS accretive latest in 2020. The transaction is subject to the closing of Bayer's acquisition of Monsanto and approval by the relevant authorities. I'm now coming to the slide Facts and Figures. In the following, I will mention the key figures for the businesses to be acquired. They are also summarized on slide four. Saori Dubourg will then describe the businesses later in more detail. For 2016, sales were around EUR 1.3 billion. The EBITDA reached around EUR 385 million.
For 2017, we expect the business to continue to grow profitably. Regionally, sales are focused on the Americas, with 70% of total sales in North America and 15% in South America. The purchase includes the relevant R&D pipeline and intellectual property, which comprises more than 250 patent families in total. More than 1,800 employees from commercial, R&D, breeding and production shall transfer from Bayer to BASF. These employees are primarily located in the United States, Germany, Brazil, Canada and Belgium. They are highly experienced and dedicated professionals who will enrich our team with their expert knowledge in crop protection, seeds and traits. The acquisition includes five chemical production and formulation sites in Germany, the U.S. and Canada. Furthermore, we will acquire 10 R&D sites that are complemented by regional seed production and breeding facilities.
Slide five gives you an overview on the strategic fit of this acquisition. It also illustrates the topics we want to elaborate on in the following. The businesses to be acquired are customer-focused and innovation-driven, with a strong track record of successful innovation. They comprise leading seed brands and well-established non-selective herbicides to nicely complement BASF's agricultural solutions offerings. Based on the complementary portfolios and R&D pipelines, we identified strong top-line growth potential. In a nutshell, this acquisition is in line with our create chemistry strategy. It will strengthen BASF's agricultural solutions offering in key row crops and markets. When you look at the agricultural market development depicted on slide six, you see that both segments, crop protection and seed, are growing at rates above GDP. During the last two to three years, we experienced a challenging environment in the agriculture industry. However, the underlying trends remain intact.
Namely, the world population continues to grow. More food is needed in the future. Therefore, the productivity per acre must further increase. Innovative and sustainable crop protection products as well as high quality and highly productive seeds will play a vital part in achieving this higher productivity. Due to the rapid adoption of genetically modified seeds and new breeding technologies, we expect that seeds will show the strongest growth in the agricultural market during the coming years. In recent years, we strengthened our crop protection division, grew the seed treatment business and further developed trait technologies. We are convinced that we have a strong and viable standalone crop protection business. However, as we mentioned several times, a meaningful seeds business can be an attractive addition to complement our offerings for farmers.
Please have a look at slide seven now and let me explain why the seeds assets to be acquired from Bayer are an attractive opportunity to enter the seed business. They include canola, oil seed rape, soybean and cotton seed businesses in the U.S., Canada, Brazil and Europe. From 2014 - 2016, sales of these businesses grew by around 14% per year. They are positioned close to customers and attuned to meeting their local needs. The canola business is market leading in North America. The package to be purchased also includes a well-established licensed business for the LibertyLink technology and high-quality trait research for canola, cotton and soybean. With that, I hand things over to Saori, who will give you more detailed Saori.
Yeah. Welcome to our call also from my side. Let's go to the slide Seed Assets in Scope. Let me start with emphasizing that with this acquisition, we will significantly enhance the long-term value contribution of our agricultural solutions business. Please go to slide number eight to find further details on this transaction. The seed assets in scope include the following businesses. First, canola hybrids in North America under the well-recognized and market-leading InVigor brand and oil seed rape seeds, mainly in the European markets. These seeds represent around 50% of the seed's portfolio. Second, the soybean seeds and traits focused on the Americas under the Credenz brand. Thirdly, cotton seeds in the Americas and Europe under the well-recognized FiberMax and Stoneville brands. The transaction also includes Bayer seed and trait research, as well as breeding capabilities for these crops and the LibertyLink trait and trademark.
Innovation and sustainability are the key growth drivers for these businesses. The canola seed differentiates through a superior pod shatter reduction technology. The soybean seed has an excellent germplasm and an enabled trait development. Cotton seed is recognized for its high yield and good fiber quality. Regionally, we see most growth potential in the Americas, which represents more than 75% of the global canola, soybean and cotton seed markets. Please go to slide glufosinate-ammonium. Key facts on the glufosinate-ammonium-based non-selective herbicide business are summarized on slide nine. Commercialized under the Liberty, Basta and Finale brand, it is complementary to BASF selective herbicide business. With its large global footprint and a strong growth track record, it is an attractive business.
It includes a state-of-the-art production network and there's also a linkage to our herbicide tolerance research in key row crops. Furthermore, it will add another mode of action in BASF's portfolio to contribute to resistance management, the main growth driver for this business. Further growth drivers include a broader market adoption in North America and increased growth in Asia and South America. From 2014 - 2016, sales of the glufosinate-ammonium-based herbicide business grew by around 17% per year. It is applied in a large number of crops. Regionally, the majority of sales are generated in the Americas. Let me highlight at this point that the businesses we agreed to acquire from Bayer are highly complementary to our existing agricultural portfolio solutions.
As shown on slide number 10, this acquisition is about growing the combined businesses together with the experienced and dedicated professionals that will join us. We want to strengthen our market presence in key row crops and selected countries. We want to offer new solutions for herbicide resistance management by using glufosinate-ammonium as an attractive mixing partner. We want to enhance our offering to farmers by adding seeds to our Agricultural Solutions portfolio. In total, we identified top-line growth potential in the order of magnitude of a mid-triple-digit million-euro amount in the medium term with high profitability. The transaction is driven by the significant top-line growth potential, but not by cost synergies. Innovation and sustainability are the key growth drivers for Agricultural Solutions.
On slide 11, we give you an overview on BASF's pipeline of novel crop protection products and the focus projects of our trait discovery research. In crop protection, we spend approximately EUR 500 million each year on research and development. The tangible outcome is a peak sales potential for our innovation pipeline of more than EUR 3 billion. Furthermore, BASF is active in trait discovery research, for which we spend more than EUR 100 million per year. We established a strong expertise in gene identification as well as integration and multiplication of genes in model organisms. The trait discovery research focuses on high-potential projects in herbicide tolerance and fungal-resistant soybean with good progress in recent years.
The combination of BASF's strong pipeline and Bayer's seed assets, as well as its trait research and breeding capabilities in scope of this transaction, will strongly enhance our innovation potential, as illustrated on slide number 12. Together, we will strive to create better solutions for farmers, connect expertise to find new solutions and boost our innovation output. What will drive our success in future is the shared dedication for innovation in both teams based on long-term commitment and passion for agriculture. The integration concept described on slide number 13 will focus on ensuring a seamless transfer and on realizing the growth potential associated with the transaction. Therefore, we set up an integration team and intend to take over sales responsibility in all major countries on day one after closing.
The glufosinate-ammonium activities will be integrated in BASF's existing herbicide business, and we will set up a dedicated global business unit for the seed businesses in BASF's agricultural solution business. The strong cultural fit between BASF and Bayer should facilitate a smooth integration of the businesses. We particularly paid attention to securing expertise and competencies to ensure the enablement of the combined businesses from day one on. The transaction is subject to closing of Bayer's acquisition of Monsanto and the approval by relevant authorities. We expect to close the acquisition of significant parts of Bayer's seed and non-selective herbicide businesses in the first quarter of 2018. With that, I hand things back to Kurt.
Yeah. Thank you, Saori. Let's conclude. The pro forma 2016 data of BASF's future agriculture solution segment is depicted on slide 14. The combined business has pro forma sales of almost EUR 7 billion in 2016. Regionally, sales will mainly increase in the Americas and Asia. We will enter the seed business with proprietary assets and will strengthen our existing herbicides business. Our R&D expenses will grow from about EUR 600 million to about EUR 800 million per year. This confirms our strong and long-term commitment to R&D in this segment. The 2016 EBITDA of the segment would have been EUR 1.7 billion. The four graphs clearly reflect the relevance of this transaction for BASF's agricultural solution segment and our commitment to this business and its customers.
The announced transaction meets all of BASF's strategic and financial acquisition criteria, as you see on slide 15. In the globally growing agricultural market, the business generated an EBITDA margin of more than 25% in recent years. With its focus on high-quality seed research, it is strongly innovation-driven. The business offers innovative crop protection solutions and seeds for canola, soybean, and cotton. With its strong earnings resilience, the transaction will reduce BASF earnings cyclicality. The acquisition meets our requirements regarding the return on investment. Finally, the transaction is expected to be cash EPS accretive in the first full fiscal year and EPS accretive latest by 2020. Let me briefly explain some technicalities which, by the way, are important. The acquisition will be an asset deal.
In this taxable transaction, the purchase price will be taxable at the seller's levels, while the reduced tax liabilities at BASF level will become effective over time. Higher depreciation and amortization after the asset step up in the purchase price allocation will reduce future tax liabilities of BASF. The net present value, the NPV of the reduced tax liabilities is estimated to be a high triple-digit million-euro amount. Considering the NPV, the EBITDA multiple based on 2016 EBITDA comes down from 15x to around 13x. With that, we come to the final slide of today's presentation. The seed assets to be acquired are a strategic addition to strengthen our agricultural solutions business in key crops and markets. Biotechnology enhances offering to our customers. Solutions beyond crop protection will continue to complement the portfolio and include, for example, soil and nutrition management.
Solutions for digital farming increase customer proximity and will further enhance our go-to market approach. Crop protection will remain the core BASF agricultural solutions business, enhanced by the glufosinate-ammonium-based non-selective herbicide business. Let me conclude by emphasizing that this acquisition is an excellent opportunity for BASF. These assets will enable us to develop a more attractive and comprehensive agricultural solutions portfolio to support farmers globally. We will be able to grow even faster by maintaining the high margin level of this segment. The grow with us you see on the slide reflects our ambition and also our commitment. We look forward to welcoming the new colleagues in our team and contribute to the success of farmers around the world together. We are now happy to take your questions. I propose that we first answer all the questions with regard to the crop protection and seed businesses.
Thereafter, if there are no questions left, thereafter we will answer any questions with regard to TDI. Steffi?
Ladies and gentlemen, I would now like to open the call for your questions. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. To ensure the best sound quality, we kindly ask you to unmute your phone and use your headset. Please limit your questions to only two at a time so that everybody has a chance to ask his or her questions. Of course, you are welcome to rejoin the queue.
The first question comes from Thomas Wrigglesworth, Citi. Please go ahead.
Good morning, everybody. Thank you very much for your presentation. Two questions. The first one is more strategic. Obviously, you are entering the seeds business now. Could you give us a little bit more sense of the kind of, you know, what your strategic ambitions are for this business? Are you just going to remain in the three classes of product that you've just acquired access to today? Do you have ambitions to kind of broaden the portfolio? You know, how now that you are committed to seeds, you know, how far and how quickly can you develop that business?
And my second question is related to the cost of financing. We've seen some very low cost of financing from German corporations buying U.S. assets. What is the BASF marginal cost of finance today? What is your WACC when you say that this deal provides a return on investment above WACC? Thank you.
Yeah, thank you, Thomas. Thank you for your questions. Hans will answer the question with regard to financing costs and our WACC, which we applied for the model. Strategic rationale and ambition. Clearly, we have always said that we have a very good crop protection business, above average growth, very good profitability. Yet the last two years, a little bit more bumpy as for everybody in the industry. We have also said that by and large, we are looking for opportunities how to enhance and support our crop protection business, meaning crops and seeds, where crop protection really plays an important role. I think this is definitely the case in the Bayer transaction. These are good and attractive crops, and these are good and attractive market positions, especially with regard to canola. Above all, there is a good research organization.
For us, it was very, very important in our talks with Bayer to ensure that we also get a business which is what people might call fully enabled, which has the breadth and width which you really need to grow the business continuously and to feed the monster, so to say, in terms of R&D expenses and future results. Which brings me to this second issue of ambition. I think we go here step by step. We now plan to enter this segment. This is kind of new for BASF, but it's not completely new because, as you know, for more than 15 years, we have been very active and I think also very, very effective and very successful in trait research.
What we missed, and that was a strategic decision which we had taken 15 years ago, was not to go into germplasm. Now we have germplasm. The simple question is, how can we combine the scientific knowledge which we have at BASF, the expertise of the future colleagues from Bayer, and our knowledge of the farming industry to grow this business successfully? I think there are lots of ideas. This is complementary to a certain degree, but it really enables us to build a stronger growth platform for that business. It needs to be seen, that was also part of your question. It needs to be seen whether we can further enlarge this business via acquisition simply because it takes two to tango.
This was now from our point of view, a good opportunity and effective opportunity to acquire a sizable, meaningful, sustainable, and fully enabled business. If you can complement this, in the future with additional markets or segments, we would certainly look at it, and then it comes down to the same acquisition criteria, which we already talked about. Does it make sense? Is BASF a good owner, and is it financially attractive? I think in this case, we can demonstrate that BASF will be a very good owner of the business. With that, Hans, financing and back.
On the financing, as Kurt has already mentioned, we've not yet made our final decision on how we will finance. It will be a combination of cash on hand. We will use bonds, and we will use our commercial paper program. During the course of the fourth quarter, we will decide what we'll actually do for a transaction that we expect to close then in Q1 2018. You also asked with respect to the WACC, and I can assure you we did not change what I would call our conservative approach. We stuck to that approach. The WACC overall for this transaction is in line with what we publish as WACC for the BASF group.
That's what we used, order of magnitude 7.5%-8%. On that basis, we will earn what needs to be earned and be EPS-accretive at the latest, as Kurt has already mentioned, in 2020.
Thank you. For modeling perspectives, we should think of maybe 100 basis points cost of financing. Is that the right kind of level?
Well, as I said, that depends in the end of what we'll do. I'll probably would pick something in the range of 100 low, 200 max.
Okay. That's very clear. Thank you both. Thanks, everybody. Very helpful.
Yep.
The next question is from Christian Faitz, Kepler Cheuvreux. Please go ahead.
Yes, sir. Good morning. Congratulations on the deal. First of all, CFIUS. You're also buying Bayer assets for a good part based in the U.S. I would believe you have checked with Bayer before that if there are any upcoming CFIUS issues, right? Second question would be, how smoothly do you believe you can integrate the R&D assets into your own R&D infrastructure on the agricultural science part? Will you be buying some assets? You will be buying some assets, I believe, based in Dormagen on the production side. How smoothly would you believe you can integrate those? Thank you.
Yeah, Christian, two important issues. Integration, this was on everybody's mind when we had the negotiation because simply we want to do this very, very quickly and very efficiently. We have thought quite a bit and prepared ourselves for this upcoming process. The idea is, as we said in our presentation, to bring the non-selective herbicides into our crop protection business and then by and large, we have a new business unit, seed. This then has to be implemented case by case and location by location, obviously. Production, I think, we will achieve good agreements with Bayer, how to be good neighbors. We have been good neighbors in the past, and that would also be possible in the future if you have operations at joint sites.
R&D for us, it was very important to get onto the experts. We have experts, but we need more experts for this business offering. We do get the scientists and the people who really are also very good at registering these products, for instance. From a location point of view, we have a relatively strong position in North Carolina, sorry, in RTP , Raleigh. Bayer has the same, so there's also proximity of locations. I think this will also help. By and large, I think we know how to run science organizations, R&D organizations. That I think I'm sure we are a good home for the scientists and technicians coming from Bayer.
As we said in our presentations, we need approvals by the relevant authorities, and we have to check yet whether CFIUS really here plays a role. That is normally nothing you do on your own, but you are approached by them, and that needs to be seen.
Okay, thanks. Again, congrats on the deal.
Thanks.
Okay. The next question is from Andrew Stott, UBS. Please go ahead.
Yeah, good morning. Thanks again for the presentation. First question was on the geographical bias of the assets. This is dominated by the Americas, so 85% of sales from North and South America. Is there anything you can do to globalize that revenue stream, or is that just a function of the crops that you're predominantly dealing with here? That's the first question, expansion in Asia and Europe. Second question was more straightforward. I think, and I wanted to check the math here, you get EUR 80 million of licensing income from LibertyLink. I want to check that number and also what's the outlook for that licensing income? And then can I just get a clarity on the tax benefit you mentioned? I just didn't quite pick up the number. Thank you.
Maybe I answer the first question that you have on the geographics. You are absolutely right. With the acquired assets from Bayer, there's a 70% share in North America, 15% South America, and 10% Asia. Only 5% is related to Europe. That has very much to do with the portfolio, which is primarily also big seed asset, which is also linked to GMO. This has a geographical reason because this is where the main market for GMO-related seed assets are. However, when you look at the research and the opportunities, there is an expansion possible also geographically, because we also get a lot of R&D portfolio in various ways that we can spread. For example, in Europe, oilseed rape has certain growth potential that we can use, and there's certainly more from a technology perspective.
The second question, taxing, would you like to?
Hans, you wanna answer how much, how big the tax asset is, really?
Yeah. I think Kurt Bock explained that already. It's in the high triple- digit million figure. I would consider this in the very high triple digit million figure.
We use the same WACC.
We use the same WACC, so overall, I'd say also they are relatively conservative calculations.
LibertyLink license income, yes, Andrew, that is part of the deal. It's an income stream which we will maintain for as long as possible, and then we try to nurture it again with hopefully future new license income coming from BASF joint research activities then.
I mean, the bottom line is that EUR 80 million is maintainable as you see it.
I'm not sure we wanna go into this detail of a business plan right now. It was a separate package being offered, but it wasn't really priced separately by us.
Okay. Thank you very much.
The next question is from Jeremy Redenius, Bernstein.
Hi, it's Jeremy Redenius from Bernstein. Thanks for the presentation and taking the questions. First of all, just a big picture question. You long talked about not wanting to be involved in owning germplasm, and yet we see the change today. Can you just describe what's changed in your thinking about owning this type of business? Then secondly, I just wanted to check a few things to see if they were included or not included. I'm wondering if the Balance GT soybean trait was included in the package, and if not, why not? I know wheat and vegetables were not included, but I'm interested to hear if you considered buying wheat and vegetable seeds and decided not to buy those. Thanks so much.
Yeah. Thank you, Jeremy. We acquired what has been offered to make a clear point here. These are questions you have to ask Bayer, obviously. We acquire which we deem to be interesting for BASF. The big question about why germplasm now, I think I tried to answer it a little bit earlier. We never ruled out that germplasm could be interesting if it is really linked to crop protection, and this would be a mutually reinforcing business proposition. There are certainly crops where we are not interested because it would be simply too far away from our crop protection business. We see actually no real synergies between crop protection and seed, at least from our point of view.
When you make such a step, you're right, this is a certain change, then the step has to be meaningful. It has to be sizable. I think, again, this is the case here with the Bayer business. It is relatively big, it is very innovative, it has excellent research, so it's a sustainable business, and those were very important criteria when we looked at what had been offered by Bayer.
The next question comes from.
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Sorry ?
Sorry, can I just clarify, though, in what you actually did buy? Let's exclude the explanation of what you didn't buy. Could you clarify within the soybean business, you mentioned traits, and you specifically call out LibertyLink. Could you say whether or not that includes Balance GT trait?
We cannot comment on the Balance GT trait, but the general comment is that we concentrate on acquire the fully enabled business here. Yeah.
Great. All right. Thank you very much.
The next question is from Peter Spengler, DZ Bank. Please go ahead.
Good morning. Thank you for taking my questions. I have two. First question is on the size of the acquisition. This is the biggest acquisition in history, hence to be financed without problems. Can we expect portfolio transactions in the near future to at least partially refinance the deal? My second question is a follow-up on the asset deal. Can you elaborate a bit more? It was very fast when you talked about it, about the large parts and the timeline for depreciation and amortization. Large parts, I mean, like, what you have in goodwill and certain assets which you have to depreciate in the future. Thank you.
Yeah, thank you, Peter. I'm gonna take the first question about any portfolio trends, and then Hans, again, will try to explain the damn tax asset issue. I think we look at each and every transaction individually, and based on the merits of the specific transaction, we make then a decision whether it really reinforces competitiveness of the BASF business and thereby also of the BASF portfolio. Now trying to acquire or going to acquire the Bayer business is for us not a reason to have a different look at other businesses of BASF. They are evaluated on an ongoing basis, and then we make up our own mind whether they still fit our portfolio. It's clearly unrelated to any, if this is the background of your question, any financing concerns with regard to balance sheet, for instance. Hans?
Yeah. I think with respect to your question on purchase price allocation, what will end up in the balance sheet, the statement that I can make at this point in time is that you can expect the purchase price to be reflected in the balance sheet since this is an asset deal. So the step-ups that will happen in this type of asset deal will in the end reflect the purchase price. So different from share deals where you typically see significant values above what is paid as a purchase price in the balance sheet. So that gives you the order of magnitude. With respect to the specific allocation in asset classes, I'd be careful at this point in time.
I mean, we've obviously done our preliminary purchase price allocation, but the real purchase price allocation we will only be able to do once we acquire the assets, and then in the first quarter after that, you will see what we have done. I think it would be preliminary to give you ranges here and orders of magnitude. What you can expect is that you find the EUR 5.9 billion then also in the balance sheet.
Okay. Thank you very much.
The next question is from Tony Jones, Redburn.
Good morning, everybody. Thanks for taking my questions. Firstly, could you talk a little bit about the competitive bidding process, maybe in terms of how the process worked and if you're able, some of the parties involved? Just going back to the licensing income, do you know if any pre-existing Bayer licensing agreements, does this transaction mean that they need to be renegotiated at all, or should we just exclude any of that? Thank you.
Tony, I'm not sure we fully understood your second question. We try to find an answer as I speak about the bidding process. The only thing I can say is that it was a very professional, very constructive process. We don't know actually who was participating in that process. We have no visibility here. The only thing I can say is that Bayer conducted the process extremely professionally and in a quite impressive way, if I may add that.
Regarding the licenses, maybe just a comment here, they are part of that deal and will be fully transferred, so we are not aware of any other negotiation necessity.
Okay. Thank you very much.
The next question is from Markus Mayer, Baader Bank.
Yeah, good morning. Two remaining questions. Firstly, can you say something on the integration costs you expect for this deal? Secondly, you talk, of course, on this revenue synergies. Do you also expect any kind of cost synergies as well, even if it's a very small amount?
Yeah. I think for the integration cost for the deal, it's too early to comment at this stage because we're in the middle of, you know, putting the concept together, regarding remedies.
No, go on. Go on.
I think that's also the same here. I think, it's still very small, but it's too early to comment on this part as well.
Okay.
Indeed.
No, no.
The idea is clearly, Markus, to conduct this process as professionally as possible. There might be some cost synergies actually in, let's say, more administrative type of operations where we can then merge activities and create additional economies of scale. What are the real drivers of the business in terms of market sales, R&D, technology development? This is by and large very complementary, and we are very much looking forward to welcoming the new employees to BASF and to create then a even stronger team together.
Okay. Understood. Thank you.
The next question is from Paul Walsh, Morgan Stanley. Please go ahead.
Yeah. Thanks a lot, Steffi. Thanks for answering my questions. My first one is whether or not this transaction has any impact on your existing relationships with Monsanto around R&D and product development. My second question is pretty straightforward financial one. Is there any Verbund benefit to integrating these assets into your portfolio? Are the businesses growing at the same pace this year as you demonstrated since 2014? Thank you.
Okay. I will answer the Verbund topic. Clearly, crop protection and therefore also now the seed business are integral parts of BASF business. We have been a very, very good owner of that business, and we will continue to be a very good owner for that business. There is also technical Verbund and that know-how transfer within BASF, which I think by and large has benefited the crop protection business as part of BASF. Monsanto relationship, we have a development relationship collaboration, as you know, and this is ongoing based on the current contracts. At this point in time, actually, we can say nothing about it because this is now all up in the air, and it needs to be seen when then the Bayer Monsanto transaction has concluded, what we gonna do.
This will be up for then talks and conversations. The growth rate question, by and large, the same which you had seen in this 2014, 2016 timeframe.
Brilliant. That's really clear. Thank you very much.
You're welcome.
Now I'm quite astonished, Laurence Alexander from the U.S., I guess, Jefferies. Please go ahead.
Good morning. Just a quick clarification for these targeted synergies, is there any incremental investment required above and beyond the step-up in R&D that you flagged?
No. Good morning, Laurence. Actually, no, not really. I mean, this is all immaterial, given the size of the deal and the P&L of the deal. No.
Perfect.
Yeah.
Okay. Thank you.
Welcome.
The next question from Andreas Heine, MainFirst. Please go ahead.
Thanks for taking my questions, two I have still. One is on the R&D. For the seed business is an enormous platform of technologies required. Have you access to all of these technologies via R&D, so whether it's marker-assisted breeding and the DNA knowledge and library for these crops and so on, so that all the technologies and all the capabilities you need, you can completely run separately and would therefore be possible also to add if you get access to the gene pool of any other crop to broaden this business with this technology platform? That's the first question. The second is, Bayer probably made this deal early as an accelerator to get the approval. It might not be everything Bayer has to do to get the approval from the antitrust authorities.
If there is more to come from Bayer, either in crop protection or in seed, would you be also interested in looking at that? Thanks.
Yeah. Hi, Andreas. Second question, I think it's a good rule never to answer hypothetical questions. At this point, this is what is being offered, obviously, and we find it attractive. We will certainly follow the process and see then how it develops, and then we have to make up our mind. I think it's simply too early to speculate about this at this point in time. And technology, Saori.
Yeah. From a technology perspective, first of all, BASF is familiar with many of the necessary technologies already, but you can rest assured the research we received here is highly enabled. It has genetic libraries, computational life science, microbiology, cloning expressions, and so on. We feel really comfortable that we can build on that expertise.
Thanks.
The next question is from Peter Clark, Société Générale. Please go ahead.
Yes, good morning. Thank you. Two big picture ones, really. Looking at the slide six, where you've got the growth rates for both seeds and crop protection in the market going out, obviously, you're still very heavily weighted in crop protection, different portfolios across the industry, et cetera. But where do you see your growth rate relative to that now you've got the Bayer seeds business within the portfolio? Obviously, you've got 3%, I think, for crop protection, 5% for seed. Perhaps it's a mid-single digit you're aiming at for the portfolio. On the financial situation, BASF, now obviously you've announced EUR 8.5 billion of deals. On my numbers, you still actually have quite a bit of financial flexibility.
Can you remind me of the acquisition criteria, the headroom that you see on the balance sheet, accepting that you've just announced two big deals? You're probably not gonna announce another one next week, but effectively where you see the balance sheet criteria again as a reminder on acquisitions. Thank you.
Peter, with respect to the balance sheet, I mean, you know us, we are, I keep repeating myself, relatively conservative. We will use balance sheet capacity for the two transactions that you are mentioning, one with Solvay that we announced recently, the other one, we're announcing today. But as I said, we have a strong balance sheet, and I don't see
Major restrictions. There's also that you need to think about, despite your balance sheet, and that is the management resources that it takes to integrate acquisitions. It takes a certain period of time, and I think I will leave it with that.
Yeah. Peter, it probably doesn't come as a surprise if I tell you that we wanna grow slightly above market, which is probably true for all of our competitors. If you add this up, the market is supposed to grow much faster. I think this is called competition.
Okay, thank you.
Now, I hope I pronounce it correctly. [Laurent Favre], Evercore. Please go ahead.
Good morning, Steffi. It's actually, Laurent Favre, from Evercore .
Oh. We have it wrong.
Good morning, everybody.
Good.
I have a quick question on slide 10 and on the base case. When you think about the base case of the acquired assets, is it fair to assume that there is growth around the pace of what you've showed or what the business has been delivering from 14 to 16? That the potential, the triple-digit number that you talk as potential for top-line synergies comes on top of that. The second related question is around profitability of the asset. You've talked about above 25%. Now, even excluding LibertyLink, I think it is clearly above 25%.
I'm just wondering, are you reluctant to call it 30 or near 30 because there's something else in the number you've provided, in terms of over-earning, in terms of exceptional gross margin, that happened in 2016 in the EUR 385 million? Thank you.
I think, Saori, we'll take the first question. I'll try to answer the second question on the margin. Clearly, that's an average which we are publishing here. It is above 25%. Our ambition is certainly to grow profitability, and to keep it at that level or to even increase that level. I'm a little bit cautious now to give you precise numbers here at this point in time. The underlying, let's say, market attractiveness and willingness of farmers to pay for innovation can lead to EBITDA margins which are even higher, clearly higher. We see this also in selected products and applications. That is how we see it.
Yeah.
At this time. Saori?
For the last three years, as you saw in the slides, as we mentioned, for the seed part, it was a big growth of 14% and the chemistry 17%, roundabout 16%. This is robust growth, and it's reflecting basically population growth. We are very confident also 17%, that the results, at least from what we know so far, look rather stable and robust going forward. Of course, we have the ambition to combine synergies and look into keeping a robust growth going forward. As you know, weather conditions vary dramatically among different geographies, so there will be differences always across the globe.
Generally, I can say that the robust trend of world population growth, necessity for improvement in food and the, you know, yield improvement for farmers that has been four times more efficient during the last four to three years will further fuel growth going forward.
Thank you. I guess when you talk about covering the cost of capital, maybe it's for Hans. You do, you know, based on similar profitability to what has been published, you do need double digits sales growth, CAGR, to get anywhere near cost of capital, at least on my numbers. Am I missing something beyond the NPV of the tax synergies which you quantified at two times the EBITDA number?
I don't want to speculate, Laurent, on this growth rate and precise numbers here. What you should keep in mind probably is that the combination of the businesses also enables us to grow other applications and other products which we have in our portfolio faster. This also, by the way, includes the non-selective herbicides which we are going to include in our portfolio. These are additional growth opportunities, and I think in the past, BASF has proven to be quite skillful in exploiting these opportunities in the market. This also has been built into the case. Clearly, we expect that the business will have a continuous high profitability, and that has to be fueled by ongoing innovation.
This is an innovation-driven business, and as I said before, farmers are essentially willing to pay for innovation. If you can enhance this by having, for instance, mixtures with BASF products, I think all of this offers additional growth opportunities. We are quite happy with the deal, both from a strategic point of view and also from a value creation point of view.
Thank you, Kurt. Thank you.
Welcome.
We have two more questions. The first now comes from Li Dunlop, and then we have Andrew Noel from Bloomberg in the line. First, Li Dunlop, JP Morgan, please go ahead.
Good morning, gentlemen. Just two interrelated questions. Just the first one is, I just wanted to understand your confidence on being able to close this early next year. I'm just alluding to your view on the regulatory process, and why you don't think it should take too long? The second question is on slide nine. I was hoping you might be able just to describe in a bit more detail why glufosinate, the non-selective herbicide is complementary. Is that because your current portfolio is mostly selective herbicides? If you could tell me, that would be great. Thank you.
Okay. Sure. Yeah, Li, Saori will answer the question on the, let's say, synergies between the non-selective herbicides and our selective herbicides. Closing process, I think we have our ducks in a row, so to say, to move as quickly as possible. I mentioned earlier on that an integration team has been appointed, and then we clearly align as much as possible with Bayer to ensure a smooth and, let's say, elegant transition process. The timeline clearly will finally be determined by the Monsanto Bayer transaction. We think this is going to happen in Q1, and that is what we are preparing for.
Yeah. To your question on the herbicides market, it requires multiple modes of action. Glufosinate is, for us, an exciting new tool for BASF, as we do not have any non-selective herbicides. This is why glufosinate is a very attractive mixing partner that we can use for multiple formulations.
Sorry, just on the first question. I understand you have to go through your own regulatory processes as well. I just wanted to understand why you're confident that your own regulatory processes should be expedited quickly.
This is Hans. I mean, if you look at the business that we are acquiring and what we have in our portfolio, as Saori just mentioned, we don't have non-selective herbicide in our portfolio. We don't have seed in our portfolio. As a result of that, we actually do not see any type of regulatory issues. As Kurt mentioned, closing of our transaction will depend on closing of the Bayer Monsanto transaction. It should follow immediately from our point of view. We expect to close our transaction Q1 2018.
All right.
We will.
Thank you.
We will certainly work as closely as possible with the antitrust authorities and provide them with all the necessary information.
All right. Thank you very much.
Now we have a final question from Andrew Noel, Bloomberg. Please go ahead.
Oh, hi. Good morning. Thanks. Thanks for taking my questions. I've got two and a half, I guess. The first is just a brief one. I mean, have you sort of written off Europe in terms of GM crops as a market? The second one is, you know, our understanding was, you know, there was another obvious, fairly obvious buyer there for this. As you headed into these negotiations, did you feel like having no exposure to this area was a strength in the bidding process? Was a bidding strength? And just the other little half one was, are you outgrowing your We create chemistry strapline for the company? It's probably 10, 15 years old. Thanks.
Hi, Andrew. I think I mentioned that this fits our We Create Chemistry strategy by and large, because that strategy is all about getting closer to customers, innovation-driven, technology-driven businesses that we can clearly differentiate ourselves in the market based on our own BASF strength. I think this fits nicely. It's a very research and customer-centric business which we want to acquire. Writing off Europe, never say never. Europe is difficult with regard to genetically modified crops. Certainly, part of the package is also non-genetically modified crops, please keep that in mind, which we can and will certainly cultivate in Europe. But with regard to genetically modified crops, Europe will remain an uphill battle. Frankly, we haven't put anything in.
to our business plan in terms of opening up, conquering the European market. That is, I think, not reasonable at this point in time. It might change. It might change over time. You never know. People might get smarter, as the rest of the world already is. We will find out about it then. Negotiations, again, it's difficult for me to comment here on any specifics. I think we put our best foot forward. We try to demonstrate that BASF can be a good owner who will drive this business successfully, based on innovation, based on our knowledge of the industry. Apart from that, it is, again, it's up to the seller to make up his mind, what he likes and what he doesn't like.
Apparently, at the end of the day, we could come together.
Okay. Thank you.
Ladies and gentlemen, this brings us to the end of our conference call. Kurt Bock wants to finalize with a few words on the TDI topic. Let me remind you that we will report on our third quarter results on October 24th. Now I hand things back to Kurt for a moment.
Yeah. As I said before, I mean, since I started the conversation today with TDI, I think it would also make sense if-
For a moment.
Yeah. As I said before, I mean, since I started the conversation today with TDI, I think it would also make sense if we ask if there are questions with regard to TDI which we should answer right now. Happy to do so. For clarification or whatsoever.
At the moment, we don't have any further questions in the queue, so we can wait for a few more.
Look, we wouldn't wait because they had one hour time to make up their minds.
You shouldn't have interrupted me.
My recommendation would be, there are a couple of journalists in the line, obviously, if you have questions, please contact our press department, and we will try to take care of your questions as good as possible. Yeah.
Okay.
Now back to you, Steffi.
Thank you. Should analysts and investors have
Without interruption, please.
Sorry. Should analysts and investors have any further questions regarding the transactions announced today, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today on short notice and have a nice weekend.