Bayer's Bid For Monsanto Might Bring Short-Term Pain, But Long-Term Gain

Germany-based Bayer AG (ADR) BAYRY has offered to buy U.S.-based Monsanto Company MON for $122 a share, which values the St. Louis, Missouri-based agricultural giant at $62 billion. But, Deutsche Bank questions "will it be enough" to please Monsanto shareholders.

Although the deal makes financial sense and would be accretive to Bayer's long-term core EPS, Deutsche Bank analyst Tim Race said, "The deal will not sit easy with Healthcare investors (and potentially limited room to address pharma pipeline concerns in the future)."

Related Link: Bayer Confirms Market Speculation, Offers To Acquire Monsanto

Similarly, Race said the prospect for near-term volatility due to the potential need to raise the bid and the prospect of an equity issuance round the corner is "likely to be unpopular with many."

Meanwhile, CNBC's Jim Cramer said the deal would be blocked.

Bayer expects to generate synergies of $1.5 billion after year three and believe the deal would be highly EPS accretive (mid-single-digit in year one, double digit by year three) and generate a premium to its cost of capital (stated at 7.7 percent) by year three.

Race expects, "assuming the synergies were realized (and not reinvested) at these levels," the deal could add up to 7 percent initially to the core EPS over the first year and over 15 percent by the third.

If Bayer raises the bid to $135 a share and assuming the additional financing via equity, the analyst said it would reduce year three EPS accretion to close to 10 percent and ROI to c.7 percent.

Race has a Buy rating on Bayer, whose ADRs fell 4.57 percent to $95.62 Monday afternoon. On the other hand, Monsanto climbed 5.23 percent to $106.83.