Shares of Monsanto (MON) moved higher Thursday after the herbicide and genetically-modified seeds company confirmed receipt of a takeover bid from Germany’s Bayer (BAYRY). Weighing in on the news, Wall Street analysts laid out the difficult financials involved in such a deal and downplayed the likelihood of Monsanto agreeing to the initial offer.
MONSANTO CONFIRMS MERGER TALKS: Forced to correct the record after Reuters published an interview Wednesday with Monsanto COO Brett Begemann stating that recent takeover rumors were “all wild speculation,” the company disclosed that it has in fact received a takeover bid from Bayer. No financial terms were disclosed, and Monsanto commented only that it is reviewing the offer. In a separate statement, Bayer also confirmed the talks, saying its executives recently met with Monsanto to discuss the potential tie-up.
UNCOMPELLING FINANCIALS: Bernstein analyst Jeremy Redenius and team argued Thursday that a merger of Monsanto and Bayer remains a “big financial stretch.” The analyst explains that the potential deal is only EPS break-even at an offer price of $108 per share, while return on capital won’t cover Bayer’s cost of capital until at least 2025. Redenius cautions further that a price closer to $120-$125 per share would be needed to secure an agreement from Monsanto, which would produce only 3%-4% accretion by 2020 even assuming rosy synergy targets. The foregoing also assumes that Bayer can raise equity funds at its current EUR 95 per share, “an unlikely scenario” that may necessitate an issuance in the EUR 85 range, making the deal only breakeven. Diving deeper into the strategic motivation behind the potential tie-up, Redenius posits that this may be the “last and only possible move for Bayer in the agriculture Tetris game,” with executives at the company’s crop science unit potentially concerned that a merger with Monsanto is the only remaining option to avoid becoming second-tier amid industry consolidation, though the analyst noted he does not share that view given Bayer’s unique positioning outside of corn and soybeans. All that said, Redenius still sees potential for value in a merger-split, via which the combined Bayer-Monsanto would spin off its new agriculture division, potentially even removing the need for Bayer to raise equity by eliminating any control premium in the offer price. The analyst adds that, regardless of the form taken by the hypothetical merger, anti-trust concerns “should be surmountable.” He keeps an Outperform rating and $125 price target on Bayer, and an Underperform rating and $80 target on Monsanto.
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