Bayer first made an unsolicited offer for Monsanto of $122 a share in May this year. At the time Monsanto was trading in the high 80s; following the announcement the share price shot to over $110 per share.
Monsanto rejected the deal though adding that it was willing to discuss further. A second offer of $125 per share in July was also rejected.
Last week Bayer returned with a third offer of $127.50. Finally, yesterday news emerged that a deal was agreed at $128 per share. Monsanto is being valued at $66 billion including debt. The new terms include an increased break fee of $2 billion should antitrust regulators block the transaction.
When interest from Bayer was first announced, some analysts were of the opinion that a deal could not be reached at a price lower than $140. Since then Monsanto disappointed in its third-quarter earnings report and low commodity prices have not abated.
The negative outlook and pressure from shareholders concerned about the risk of losing a short term cash windfall, appear to have led Management towards a more realistic price. The last time Monsanto traded at the offer price was before the financial crisis of 2008.
Shareholders in Monsanto will thus be able to capitalize on their investment immediately and still have the option of buying into a combined Bayer-Monsanto if they believe in the joint company.
Last year two of the industry’s major player, DuPont Co and Dow Chemical Co. agreed to merge. In February, China National Chemical Corp. agreed to acquire Syngenta AG. The Bayer-Monsanto deal means that within a year the number of players in the market will be reduced to just four.
Bayer will fund the transaction with a combination of cash and equity. The equity component of about $19 billion will be raised through issuance of convertible bonds and a rights offer. Bayer is currently trading at €97 per share; which appears to be pricing the above transactions.
The transaction values Monsanto at about $56 billion. Currently, Monsanto is trading the at $107 per share. The potential deal provided an upside of 20 per cent for investors. From this point onwards the main risk is an eventual rejection by regulators. Bayer have already selected assets that will be sold to satisfy regulator concerns on competition.
The deal will create the world’s largest seed and farm chemical company touching much of the global food production through the development of seed and pesticides. The combined company will have a strong presence spread across the US, Europe and Asia.
Bayer is promising Monsanto clients a broader range of products such as seeds and pesticides that work together. New products and innovation would increase the amount farmers can grow from a given acreage.
Going forward the price of Monsanto will move closer to $128 per share as regulation hurdles clear. At this point markets are giving a 50 per cent probability of the deal going through without hiccups.
Disclaimer: This article was issued by Antoine Briffa, 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.