Citi On Possible Monsanto, Bayer Tie Up: 'Tax Synergies Unlikely To Be The Driver'

Monsanto Company (NYSE: MON) has received an unsolicited offer from Bayer, although the terms have not been disclosed. Citi’s P. J. Juvekar maintained a Neutral rating for the company, with a price target of $94. The analyst commented that there were challenges to the completion of a deal, while giving his views on potential synergies, including tax synergies, among other aspects.

Potential Synergies

Analyst P. J. Juvekar said that Monsanto is likely to command about $130 per share, and the bias is towards an upside to this. The synergies could range from 2-3 percent of the combined entity’s sales, which equates to ~$1.3B.

Tax Synergies

Juvekar commented that tax synergies were unlikely to be the driver for the deal’s completion. He wrote, “This proposal should not be directly compared to MON’s attempt to acquire Syngenta last year. That proposed transaction was partly driven by anticipated tax savings from moving the combined company HQ to the UK.”

On the other hand, Bayer’s tax rate is about 24 percent, while Monsanto’s tax rate in the US is 25-26 percent. Hence, significant tax savings are unlikely.

Potential Regulatory Concerns

Juvekar pointed out that there was significant overlap in the cotton seed business of both companies. When Monsanto acquired Delta and Pine Land, it needed to divest its own cotton business. This was acquired by Bayer. He added, “As a result, we think one of the cotton franchises would have to be divested.”