Although the chance of a tie-up has increased, we're sticking with stand-alone fair values for now as we think Bayer is already toward the upper end of what it's willing to pay for Monsanto.
By Jeffrey Stafford, CFA | 09-06-16 | 10:06 AM | Email Article

 Bayer  has again upped its takeover offer for  Monsanto . Both companies confirmed an updated offer of $127.50 per share, up from the previous proposal of $125. Bayer began its pursuit of Monsanto by offering $122 per share in late June.

Jeffrey Stafford, CFA, is director of energy and utilities research for Morningstar.

We don't think Monsanto's board will accept an offer below $130 per share, and we maintain our Monsanto and Bayer fair value estimates at $120 per share and EUR 126 per share, respectively. These fair values represent stand-alone values for both entities. Although the chance of a tie-up has increased, we're sticking with stand-alone fair values for now as we think Bayer is already toward the upper end of what it's willing to pay for Monsanto. We think Monsanto would be worth $130 per share to Bayer as a result of our $1 billion annual cost synergy estimate. As such, we wouldn't expect a dramatic change to our current Bayer fair value estimate if a deal is closed near $130.

The market remains skeptical that a deal will close with Monsanto shares trading at about $107 per share, a roughly 15% discount to the updated offer price. With the companies getting closer on price, we think a healthy portion of this skepticism is related to antitrust concerns. We see regulatory concerns as less of a hurdle because of the lack of broad overlap between the portfolios of Monsanto and Bayer. Monsanto's ag business is tilted toward seeds, and Bayer's is tilted toward crop chemicals. We do think Bayer's seed business, which includes soybeans, cotton, and vegetables, would be sold as part of a deal. But we don't think regulators would get too hung up on the overlap in herbicides, where Monsanto's only position is in commoditized glyphosate, which has suffered recently from oversupply out of China.

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Jeffrey Stafford, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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