Regulatory concerns aren't much of a hurdle because of the lack of broad overlap between the portfolios of these agriculture companies.
By Jeffrey Stafford, CFA | 09-14-16 | 08:12 AM | Email Article

We thought it would take a minimum of $130 per share to entice  Monsanto's board. We were two dollars short. On Sept. 14, Monsanto accepted  Bayer's acquisition offer of $128 per share, including a breakup fee of $2 billion (4% of Monsanto's market cap). The acceptance comes after months of back-and-forth between the two companies, beginning with Bayer's initial offer of $122 per share in June.

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

The purchase price values Monsanto 6.7% above our stand-alone fair value estimate of $120 per share. Our Bayer stand-alone fair value estimate is EUR 126 per share, versus a trading price of almost EUR 98 per share. We think Monsanto would be worth about $130 per share to Bayer as a result of our almost $1 billion annual synergy estimate (versus management's estimate of $1.5 billion). As such, we don't expect a dramatic change to our current Bayer fair value estimate if a deal is closed at $128. Bayer expects to fund the the $66 billion (including net debt) all-cash deal with $19 billion of equity and the rest in debt.

With terms agreed upon, the market remains skeptical that a deal will actually close. Pre-market open, Monsanto shares traded near $106 per share, a more than 15% discount to the purchase price. We think this skepticism is primarily 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, will 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. As such, we plan to move our Monsanto fair value estimate close to $128 per share.

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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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