On Monday, German conglomerate Bayer AG finalized its $62 billion takeover offer for American agrochemical company Monsanto (MON). The acquisition would create the largest agrochemical company in the world. Here is what the sell-side is saying.
Monsanto- Bayer – deals, deals, deals
At $122/share for Monsanto and no disposals the deal would require BASF to issue equity (Bayer issuing ~25% of the deal value) and would imply a deal ROIC in FY5 of 8.5%, 40bps below their WACC of 8.9% and below the buyback equivalent ROIC of 8.8%. The deal, however, would imply €4.55/share in FCF accretion in FY5 enabling BASF to delever to 0.5x net debt/EBITDA in the same time frame. If they levered back to 1.5x in FY15, we estimate EPS would reach €10.20/share.
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Another round of rejections? We expect Monsanto to object to the offer, given its conviction (more adamant than ours) in its R&D pipeline and longer-term competitive advantages. The current target of a mid-teens CAGR implies calendar 2019 EPS of ~$7.70,which on a 1.5x PEG ratio would imply a $169 stretch value, or $127 this year if discounted at 15%. Believing the prior targets would have supported a path to $10 in EPS and a stretchtarget >$250, and >$189 this year on a 15% discount rate.
We expect Monsanto (MON, Hold) to resist any offers under ~$150/share, given that discussions are occurring at the trough of the ag cycle. The
Bayer’s net debt to EBITDA was 2.8x in 2015. The company guides for net financial debt to be below EUR16bn at the end of 2016.
Value-destructive competitive seed dynamic in 2016. MON reiterated prior commentary on seed pricing weakness in NA. The company cited advanced levels of discounting and seed giveaways by a major competitor, which forced advanced discounting at MON to retain market share. This view has been refuted by the competitor. Whatever the cause might be, weak seed pricing is a headwind for the industry that is fighting against broader cyclical weakness.
Combination would create a whale of a seed/pesticides competitor (Apologies to the legendary novel, but we note that Mobay Chemical was an earlier JV between Bayer & Monsanto (in urethanes), that was bought out by Bayer). Senior mgmt. discussions for Bayer to acquire Monsanto have been confirmed (“So it is true: Bayer evaluates Monsanto takeover”, 5/19/16), which we discussed earlier (“Bloomberg reports on Bayer/MON (earlier reported BASF/DuPont”, 5/12/16). A Mon/Bayer combo could create the world largest firm in both seeds & pesticides.
Overall it is now clear that Bayer is unlikely to back away from this transaction even though they will probably have to pay more, hence Investors will have to adjust to the reality of 50:50 Heathcare:Crop Science company which is stretching Bayer’s balance sheet – if the deal is completed. While the strategic rationale from a Crop Science point of view remains clear, dilution of Healthcare will continue to disappoint some investors, therefore while Bayer’s standalone shares are trading substantially below our last published Sum of the parts at €118, we do not expect a recovery in the near-term.
An error. This is because by offering to acquire Monsanto at a discount to S g ( 3.7x ‘ 7E E ITDA 5.8x ‘ 6E E ITDA ChemChina is paying for Syngenta) and a 4% discount to Monsanto’s share price less than 2 years ago, Bayer’s bid looks to be opportunistic. Also, by not putting its best foot forward with its initial bid, Bayer has ceded the high ground in the takeover battle to MON. While we believe a Bayer acquisition of Monsanto is still a possibility, the less-than-serious initial bid enables Monsanto board to i) credibly reject the offer and ii) make a victory for Bayer more challenging. We continue to believe that if Monsanto were to be acquired, the Monsanto board would seek a price of ~$150/share.
See some visualizations below on the companies