Monsanto Company: MON Stock Owners, Take the Offer!

Don’t let it be said new Bayer AG (ADR) (BAYRY) CEO Werner Baumann didn’t hit the ground running after taking the helm of the German drugmaker just three weeks ago. Whether Baumann is running in the right direction, however, remains to be seen. And Baumann’s decision to acquire Monsanto Company (MON) — yes, the U.S. based seed supplier — has drawn just as many jeers as cheers.

Monsanto Stock Holders: Take the Offer! (MON)The details: Bayer has offered $122 per share of Monsanto stock — a 37% premium to the MON stock price before the news. That offer values Monsanto at $62 billion.

The deal has yet to be taken, and most observers agree Monsanto shareholders will try to squeeze out at least a little more from Bayer. Either way, though, some sort of deal looks imminent.

Monsanto and Bayer: Not-So-Strange Bedfellows

It seems a bit of a misfit at first: What would a pharmaceutical company hope to gain in the agricultural game? The answer is that Bayer is deeper into agriculture than one might realize, via its crop-protection chemicals.

Monsanto is no stranger to the pesticide aspect of the business either; its “Roundup Ready” crops were specifically engineered to thrive despite the presence of the hotly debated weed killer. The combination of the two companies’ research and development arms could lead to some impressive (if not concerning) leaps forward in effective agriculture.

It’s also something of a must-do for Bayer, as weak commodity prices are forcing companies in all facets of the business to join forces.

Case(s) in point: Dow Chemical Co (DOW) and DuPont (DD) are teaming up to create an agricultural company, and ChemChina is acquiring Syngenta AG (ADR) (SYT) after Syngenta rejected Monsanto’s cash and share bid. Another German player, BASF, has also expressed interest in buying Monsanto.

For Bayer, it’s best to pay a premium for a partner worth having than being forced into a bad deal later with a sub-par acquisition target.

Baumann added about the offer:

“Monsanto is a perfect match to our agricultural business. We would combine complementary skills with minimal geographic overlap… The acquisition of Monsanto checks all the boxes in terms of strategic fit and value creation potential. At the same time, ongoing consolidation activities in the industry make this combination by far the most attractive one.”

Multiple Concerns

The superficial logic of the pairing holds water. Not everyone is thrilled with the proposal, however. One of the more philosophical issues tainting the would-be deal to acquire Monsanto is its history with genetically modified organisms.

Although they increase crop yields, tampering with the genetic makeup of food plants may pose unknown risks to those who ingest them. While U.S consumers don’t like them, they do tolerate GMOs. The rest of the world isn’t as forgiving. The presumed name change for Monsanto may only scratch the surface of the backlash Bayer experiences if it proceeds with the deal. And while the National Academies of Sciences Engineering and Medicine recently put out a report claiming GMOs are indeed safe for consumption, anti-GMO groups aren’t buying it.

The other key criticism of the generous offer for Monsanto stock is that it’s arguably too generous. As Union Investment’s fund manager Markus Manns explains:

“The price that has now been disclosed is at the upper limit and it is just about economical. Should it rise further, which is to be assumed, the takeover will become increasingly unattractive.”

Baumann argued the union would create $1.5 billion worth of synergies within the first three years of its consummation. That goal was described as “very ambitious” by some analysts, implying Bayer would do well to find common costs that could be culled between the two disparate — industry and geography-wise — companies.

In the meantime, sales as well as earnings continue to deteriorate for Monsanto, as they do for most fertilizer and seed companies. If that trend continues, those cost savings may end up meaning nothing, and perhaps even sap funds Bayer needs to continue developing its pharmaceutical portfolio.

Bottom Line for Bayer Monsanto Stock

There’s no denying the offer is an attractive one for owners of MON stock, especially after ChemChina snatched Syngenta from the bargaining table after Monsanto played the hard-to-get game a little too well. It’s not often a suitor is willing to pay more than 15 times the EBITDA for a business that’s shrinking. Monsanto shareholders would be wise to accept the deal, or at least not press their luck.

Bayer shareholders, on the other hand, are on the losing side of this expensive proposal, which requires a lot of things to fall perfectly into place for it to pay off.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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