Reuters is reporting that Bayer has approached U.S. drug firm Elanco Animal Health to discuss a possible combination of their pet-health businesses to create an industry giant.
The two companies are working with banks to ensure any merger would secure regulatory approval, sources said, speaking on condition of anonymity.
Bayer has delayed the launch of an auction to private equity funds to clinch a bilateral deal with Elanco, the fourth-largest player in the animal health industry globally, the sources said.
The German drugmaker is under pressure to raise cash and boost its share price after its $63 billion purchase of Monsanto.
Elanco inherited a significant amount of debt from its previous owner Eli Lilly, which spun it off last year.
As of December, it had about $2.5 billion of overall senior debt. In its annual report, it warned investors about the risk of failing to generate sufficient cash to service all its debts.
The sources said an all-cash sale to Elanco was unlikely, adding Bayer would need to keep a stake in the merged company to secure a deal.