If Bayer Deal Falls Through, Could Monsanto See $92 Handle?

Shares of Monsanto Company MON could drop to about $92 if the potential deal with Bayer AG (ADR) BAYRY fails to take off.

In May, Germany's Bayer offered to buy Monsanto for $62 billion, or $122 a share. Monsanto rejected the offer terming it as "incomplete and financially inadequate," but said it was open to engage further in negotiations.

"We think it would take $135–$140/shr (implies 16.6x–17.2x our new '17 EBITDA) for MON to open its books. While the likelihood of some kind of a deal has increased, we think the possible downside share price risk is ~$92 without a deal (based on ~19x Seed EPS and ~10x Ag Productivity EPS)," analyst P.J. Juvekar wrote in a note.

Related Link: CLSA Says Buy The Dip In Monsanto When The Bayer Deal Falls Apart

Juvekar noted there are only a few strong agricultural chemical partners left for consolidation.

"BASF or Sumitomo Chemical are possibilities for some kind of deal including JVs, in our view," the analyst continued.

Rating And Justification

However, Juvekar maintains Neutral rating on Monsanto, citing industry uncertainty as agricultural fundamentals are bouncing along the bottom.

"Seed pricing did not hold up during 2016 amid tough competition, resulting in lower top-line growth and profitability. The guidance for '17 is softer and we do not see a turnaround in seed pricing until the grain cycle improves," Juvekar highlighted.

As such, the analyst slashed 2016 EPS estimate by $0.20 to $4.40 versus consensus estimate of $4.54.

Related Link: Monsanto And TargetGene Agree On Gene Editing Technology To Advance Global Agriculture Innovation

That said, Juvekar added that Monsanto does have a few positives for 2017 including a $200 million benefit from the lack of Xtend costs ($100 million) and lower cost of goods sold ($100 million).

The company expects positive price lift next year, but "we are not fully convinced until we see how this year's crop harvest impacts grain prices."

Juvekar raised the target price to $112 from $94 based on increased probability of a potential transaction.

At time of writing, shares of Monsanto fell 1.86 percent to $101.49.