Bayer is sounding out its debt financing options with banks to prepare for takeover opportunities such as one that may arise from Pfizer's mooted exit from veterinary medicine, people familiar with the matter said.

Germany's largest drugmaker is encouraged by increasingly favorable market conditions for corporate bond issuers but is not eyeing a specific takeover deal, the sources said.

"Bayer is talking to bankers to see if the company can secure financing if there is a big takeover option," one of the sources said.

New corporate bond issuance in the first two months of 2012 made the strongest start to a year since 2010, as borrowing costs drop on better economic news from the United States and Europe, Standard & Poor's said earlier this month.

Market participants say German corporate bond markets have had a particularly strong run in recent weeks.

Bayer's finance chief said last month he aimed to cut the group's debt by about €1 billion ($1.3 billion) to 6 billion euros this year to gain flexibility as it scans the market for takeover targets.

A Bayer spokesman said the company never commented on market rumours.

According to news reports, Bayer and Novartis are in various stages of bidding for Pfizer's animal-health unit.

Bloomberg reported Bayer is weighing a bid for the unit and discussing how to raise funding with banks, while The Wall Street Journal cited people familiar with the matter as saying Novartis had recently made an approach to buy the business, which, if sold, could fetch between $15 billion and $20 billion.

The preliminary offer made by Novartis is valued at as much as $16 billion, according to the WSJ, but this was rebuffed as too low, the paper said.

Despite the takeover interest, Pfizer may still be leaning toward spinning off the animal-health division because of the large tax bill, which one report said could reach $5 billion, as well as the antitrust scrutiny that an outright sale would trigger.

Several bankers told Reuters Pfizer would likely prefer offering all or a stake in the unit to its own shareholders rather than selling it outright, mainly for a lower tax bill but also because it would avoid any antitrust remedies.

"I hardly see why a buyer would want to compensate Pfizer on the tax loss. $5 billion is huge," one of them said.

A Pfizer spokesman signaled that tax would be an issue.

"Our decision about strategic options will be driven by value creation and delivering the best after-tax value for our shareholders," he said.

Bolt-On Buys

He added that all options remained open, including a sale or a spin-off. "We will be in a position to announce any decision in 2012, and continue to expect to complete any transactions that may result from this decision between July 2012 and July 2013."

As for Novartis, the idea of it splashing out $15-20 billion on another acquisition so soon after buying U.S. eyecare group Alcon for $51 billion in 2010 puzzled some analysts and bankers.

In addition, Chief Executive Joe Jimenez has said on a number of recent occasions he was focused on bolt-on acquisitions of around $1-2 billion.

One senior healthcare banker said Novartis's interest was "purely a tactical move" aimed at pushing the price up and making sure any competitor would need to pay a lot.

"It's difficult to understand Novartis doing it, given they are still paying down Alcon," a healthcare analyst in London said.

Bayer has said repeatedly that in case of a larger takeover it would exhaust all debt and equity financing options before considering a sale of its MaterialScience unit, which is the world's largest maker of plastics for car lights and sports goggles and of chemicals for padding and insulation foam.

The global animal health sector is dominated by Pfizer, Merck & Co's Intervet unit, Sanofi's Merial, Eli Lilly's Elanco, Novartis, Bayer and unlisted Boehringer Ingelheim.

The sector is attractive because it is driven by brand loyalty and therefore higher margins. In addition, economic growth in emerging economies leads to more meat consumption and livestock farming and also to more money spent on pets.

Both the Novartis and Bayer businesses are small by comparison with rivals and there has been speculation among analysts that they might quit the sector if they could not find the right assets to increase their footprint.

For the large players, meanwhile, antitrust issues would rule out a move on Pfizer's operations. Sanofi CEO Chris Viehbacher, for example, said this week he would "probably not" be a bidder for Pfizer's animal-health business, in part because of the regulatory issues.

Novartis was not immediately available for comment.