MON-BAYER: What Price is Right?

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SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

May 25th, 2016

MON-BAYER: What Price is Right?

  • BAYER’s bid for MON is consistent with the new realities of the Ag Chemical industry
    • This deal would fulfill the holistic vision of putting seeds, traits, crop protection chemicals, and data under one roof – MON previously endorsed this vision by attempting to acquire Syngenta
    • Consolidation affords cost cutting opportunities, which should be significant for BAYER-MON given the leading revenue share for the pro forma entity
      • We wrote previously that BAYER had the greatest synergy opportunity in acquiring MON due to its absolute size and the portfolio combination creates a balanced seed/chemical Ag company with leading technology
    • This is the latest move in a round of industry consolidation that should only improve Ag fundamentals coming out of the cycle trough
  • MON felt the initial offer was too low, and they are justified in this position – but what is the right price?
    • Our previous work on MON (from March, before the BAYER whispers) suggested a current fair value for the stock of $102 based on an 18.5x multiple of 2019 EPS (~$7.20), discounted to the present
    • Bayer’s synergy target of $1.5 billion represents 6% of combined sales and is supported by using DOW-DD’s target as a proxy
      • DOW-DD numbers equate to ~8% of revenues – we believe the haircut implied for MON-BAYER is appropriate given specific opportunities for those companies and likely restrictions on headcount reductions in Europe for BAYER
      • As is the case with DOW-DD, the synergy target is likely a floor rather than a ceiling
    • Capitalizing the $1.5 billion in synergies at 10x gives $15 billion – roughly $35 per MON share
    • Added to our fair value estimate of ~$102 brings us to the neighborhood of $135 per share
  • BAYER indicated no meaningful regulatory hurdles, but selected divestitures may be required
    • BASF is on the verge of being left out in the cold with respect to ag consolidation – making the company a plausible bidder for mandated asset sales from BAYER-MON, and potentially increasing the likelihood of a bid for FMC

Exhibit 1 Source: Capital IQ, Company Presentations, SSR Analysis

A Preview of the Possible Combined Entity

We wrote previously that BAYER had the greatest synergy opportunity in acquiring MON due to its absolute size and the portfolio combination creates a balanced seed/chemical Ag entity – Exhibit 2. BAYER would fill out the crop protection chemical side very well, while MON’s leadership in seeds (germplasm) and traits is unquestioned and would enhance BAYER’s diverse but smaller business here – Exhibit 3. MON-BAYER would the clear leader in global Ag revenues – Exhibit 4.

Exhibit 2

Source: Capital IQ, Company Presentations, SSR Analysis

Exhibit 3

Source: Company Reports, SSR Analysis

Exhibit 4

Source: Company Presentations, SSR Analysis

Margin Comparison

Exhibit 5

Source: Capital IQ, SSR Analysis

Exhibit 6

Source: Capital IQ, SSR Analysis

Valuation History

Exhibit 7

Source: Capital IQ, SSR Analysis

Exhibit 8

Source: Capital IQ, SSR Analysis

Exhibit 9

Source: Capital IQ, SSR Analysis

Exhibit 10

Source: Capital IQ, SSR Analysis

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