Monsanto Shares Have $15-$20 Downside If Bayer Deal Falls Apart
Monsanto has rejected Bayer's $122 a share offer, but is open to talks on a revised value.
Another Look At The Deal
"While Bayer is likely to raise its $122/sh offer, it is by no means certain that a mutually acceptable valuation will be agreed. Moreover, we would expect the stock to trade at a significant discount to any agreed offer, reflecting the considerable regulatory risk," analyst Colin Isaac wrote in a note.
Isaac said, "[W]e think an offer of $140+ will be required to secure a management recommendation [...] At $140, the implied transaction value is €61 billion ($67.9 billion).
From Bayer's point of view, the analyst estimates Bayer "would need to raise $20 billion of equity." But, the German company's target of double-digit EPS accretion from the merger "still looks achievable," with synergies estimated at $1.5 billion.
Isaac highlighted the regulatory risk on the merger. He noted Syngenta AG (ADR) (NYSE: SYT) "has consistently traded at a CHF 60-70/share discount to ChemChina's CHF 470 agreed cash offer, reflecting the considerable regulatory risk that could delay closing for several months."
As Dow Agroscience and Pioneer also merging, regulators will inevitably have a closer look at the Monsanto + Bayer Crop Science deal.
"Although direct overlap is limited, the combination would have a high share of the broad 'crop protection' market globally (i.e. biotech + chemical solutions), a prospect that raised significant concerns when Monsanto bid for Syngenta," Isaac elaborated.
"Based on the current Syngenta discount (15 percent), a $140/sh offer for Monsanto implies a stock price today of $120," the analyst added.
Meanwhile, Monsanto continues to face significant earnings headwinds. "With no organic growth," Isaac noted, "FY16 EPS guidance of $4.40–5.10 can only be achieved if licensing deals are signed before year-end (Aug 31st)."
In addition, the analyst added, "Problems monetizing Intacta in Argentina and the absence of full approvals for Xtend soybeans present further risks into FY17."
At the time of writing, shares of Monsanto were up 0.13 percent to $109.76, while ADRs of Bayer were down 1.23 percent at $95.22. The analyst has a $105 price target on the stock.
Latest Ratings for MON
|Feb 2017||RBC Capital||Initiates Coverage On||Sector Perform|
|Nov 2016||OTR Global||Upgrades||Negative||Mixed|
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