About Bayer AG (market cap €71 billion)
Bayer AG produces and markets healthcare and agricultural products, and polymers. The Company manufactures products that include aspirin, antibiotics, anti-infectives, and cardiovascular, oncology, and central nervous system drugs, over-the-counter medications, diagnostics, animal health products, crop protection products, plastics, and polyurethanes.
About Monsanto (market cap $46 billion)
Monsanto Company provides agricultural products for farmers. The Company's business segments are seeds and genomics. Monsanto produces a wide range of seeds and develops biotechnology traits that assist farmers in controlling insects and weeds as well as provides other seed companies with genetic material and biotechnology traits for their seed brands.
Terms of the deal
Bayer originally made offer to buy Monsanto in an all cash offer for $122/share. This translates into an enterprise value of $61 billion ($54 billion in market cap and $7.1 billion in net debt).
Last night Monsanto rejected the deal though added that are willing to discuss further. The market is quoting $130 as a fair bid at this stage.
Market does not expect the deal to go through
Monsanto shares have rallied 27 per cent post the announcement but are far off the $122/share offer. The shares are currently trading at $109/share. Why?
The most likely reason why the shares are not trading close to the offer price is because the market doesn’t believe the trade will go through mainly due to regulators not accepting the merger between the two companies.
$150/share is more likely but has a low probability of happening
Bayer is trying to take advantage of the difficult market environment Monsanto is trading in and came up with an offer of $122/share.
It is estimated that if Monsanto manages to double its earnings over the next 5 years through an improvement in technology and market conditions, a more likely offer would be $150/share.
Bayer market cap fell by 20% after the announcement
After Bayer announced its interest in purchasing Monsanto shares, shares have fallen by 20 per cent. This due to two main reasons being:
1. Part of the acquisition (25 per cent) will be financed by equity;
2. The uncertainty of whether the synergies will actually occur in years to come
Arguments in favour of buying Monsanto shares:
• $122 is the first offer made by Bayer. Yesterday Monsanto rejected this offer. If Bayer comes up with an improved bid, it will be beneficial for Monsanto shareholders
• If Bayer had to offer $130/share, that would be a 20 per cent upside whereas if it had to eventually offer $150, that would be a 40 per cent upside from yesterday’s close
• Other market players in the industry such as BASF could put in a bid to buy the company creating competition
Arguments against buying Monsanto shares:
• If Bayer do not come back with an improved offer, we expect to see heavy selling in the shares
• Market does not expect regulators to approve the merger if a deal is reached
• The industry which it is in is facing hard times, particularly from emerging markets so without Bayer’s interest, Monsanto shares do not make an attractive investment opportunity in the short term
Arguments in favour of buying Bayer shares:
• If Bayer walks away from the deal, we have a price target of €121/share
• Long term, we see Bayer as an attractive buy at current prices
• There is scepticism that the deal will not go through because regulators will not allow it. That would result in a strong rally in Bayer shares
Arguments against buying Bayer shares:
• Management could continue pushing the bid up putting additional pressure on Bayer shares (however we do not expect this to happen)
Conclusion
Monsanto - High probability of further negotiations. If Bayer had to increase its bid price, Monsanto shares would continue rallying. However the base case scenario reflected in the market price appears to be that the deal will not go through because if the market was pricing a conclusive deal, Monsanto’s price would today be closer to $122/share.
Bayer - If the bid for Monsanto had to be withdrawn or the deal will not be concluded, Bayer shares are highly attractive at this price. We have a 12 month price target of €121/share (without Monsanto takeover).
Taking any position at this stage is highly speculative.
Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.