The Many Facets Of Financial Engineering: Bayer/Monsanto

Monsanto Company MON has received an unsolicited, non-binding proposal to be acquired by Bayer. Bernstein’s Jeremy Redenius maintained an Underperform rating for Monsanto, with a price target of $80. The analyst commented that while some tax benefits were likely, they would not change the overall economics of the deal.

Having met a tax expert “to better understand the potential for tax synergies of any possible deal,” analyst Jeremy Redenius said that Bayer could record ~€400m in annual tax savings by acquitting Monsanto and then re-domiciling the acquired entity into a low-tax jurisdiction, like Ireland.

“We estimate that the hypothetical tax benefit which would come from the Monsanto side would be ~€320m p.a. based on lowering the tax on Monsanto's $3bn PBT from 27% to 15%. In addition through service agreements, the Bayer group could shift profits to group companies where they have losses to further reduce their tax burden. We estimate this could add another €80m p.a.,” the Bernstein report noted.

Spinning The Agri-Business

Redenius believes that Bayer would not be able to efficiently spin the agri-business into a low cost jurisdiction. Bayer may consider spinning out its BCS unit, merging it with Monsanto, and re-domiciling this in a low tax jurisdiction.

The analyst mentioned, however, that doing so would need Bayer to incur a onetime tax based on the difference between the book value and market value of the assets, at the German tax rate of 30 percent.

Assuming a deal price of $120-$125 per share to acquire Monsanto, the deal still appears to be barely accretive, at ~5 percent, in view of the €22B equity raise needed, Redenius added.