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Monsanto, once M&A instigator, now possible target

May 13, 2016
Chemical Value Chain

A year after Monsanto Co sparked a massive consolidation race in the agrochemical industry by bidding for a rival, the world’s largest seed company now finds itself in the uncomfortable role of takeover target.

Monsanto shares rallied as much as 12 percent on Thursday on new reports that Bayer AG and BASF SE were interested in the St. Louis-based company, highlighting the drive for more marriages in the sector.

Bloomberg News reported Bayer was exploring a bid for Monsanto, while financial news website Street Insider reported that BASF was looking at a Monsanto acquisition.

Monsanto, Bayer and BASF all declined to comment.

Talk of such deals has swirled for months as Monsanto faced mounting corporate woes and rivals met with advisers to weigh various deal combinations.

Both Bayer and BASF have been exploring tie-ups with Monsanto for several months, but valuation concerns have made a deal elusive, people familiar with the matter told Reuters on condition of anonymity.

The sources said both were concerned about the price Monsanto shareholders would want, emboldened by recent deals.

Consolidation has been spurred by high inventories and low prices for agricultural commodities.

ChemChina agreed in February to acquire Switzerland’s Syngenta AG for $43 billion after Dow Chemical Co and DuPont inked a deal to combine into a $130 billion company in December.

Still, some analysts were skeptical such a deal involving Monsanto would go through, or were even necessary for Bayer or BASF even though combining businesses would be complementary.

“This is a rumor of a speculation of a company talking to an investment bank doing M&A,” said Bernstein analyst Jonas Oxgaard said. “It doesn’t get any more vague than that.”

ANNUS HORRIBILIS

As recently as a month ago Monsanto’s management denied the likelihood of any near-term deals. Chief Executive Officer Hugh Grant said on an analyst call the company no longer saw large-scale M&A as an opportunity. Smaller research and development or commercial partnerships were more likely.

That was just the latest headline in an annus horribilis.

Before Thursday’s merger talk boosted its stock, Monsanto’s market cap had fallen 28 percent in the past 12 months as its four largest rivals announced bids to merge.

On top of that, U.S. regulators delayed approval of a key new weed killer, dicamba, and glyphosate, the herbicide key to its Roundup weedkiller, was labeled a probable carcinogen by the World Health Organization.

U.S. securities regulators said in February the company would pay $80 million in a settlement over accounting violations.

Overseas, Monsanto is embroiled in a royalty fight over cotton seed pricing in top grower India, and a similar battle over soybean royalties in No. 3 soybean grower Argentina. And the lack of timely import approval from the European Union derailed the launch of its next-generation GMO soybean seeds in the United States and Canada this spring, as major grain companies said they would not accept the crops.

Amid the setbacks and challenges, the Monsanto management team has remained largely intact, leading analysts to conclude it performed adequately during boom times, but may have been overmatched by the wave of change.

‘DEFINITELY AN OPPORTUNITY’

“The difficult headlines along with their significant slowdown in growth, which has impacted the valuation more than the headlines, is definitely an opportunity (for an acquiring company),” said Brett Wong, senior research analyst for agriculture at Piper Jaffray.

In recent years Monsanto has taken on a substantial debt load, in part for a $10 billion share buyback program, which could make it unappetizing to potential bidders.

Over the last two years its debt-to-equity ratio has jumped to 2.17 from 0.23, according to Reuters data. Monsanto stock is down nearly 30 percent and it has sold a large amount of bonds, putting debt at more than twice the value of its equity.

Any deal between Bayer and Monsanto would raise U.S. antitrust concerns because of the overlap in the seeds business, particularly in soybeans, cotton and canola, two antitrust experts said.

Bayer is No. 2 in crop chemicals, with an 18 percent market share, according to industry data. The largest, Syngenta, has a 19 percent share. Monsanto is the leader in seeds, with a 26 percent market share, followed by DuPont, with 21 percent.

Still, a U.S. antitrust review involving any combination could include a product-by-product analysis or a broad look at a suite of products, similar to the Justice Department review of the now-scuttled merger of oil services giants Halliburton and Baker Hughes, said Seth Bloom a veteran of the Justice Department now at Bloom Strategic Counsel.

Monsanto rose as high as $100.85 before easing to $97.66, up 8 percent. Bayer was down nearly 5 percent while BASF shed 2.1 percent.

By Ludwig Burger, Karl Plume and P.J. Huffstutter

Source: Reuters

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