MON – How Patient Are The Shareholders, Especially the New Ones

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

August 18th, 2016

MON – How Patient Are The Shareholders, Especially the New Ones

  • MON has reaffirmed its guidance for the year (ending August) – while at the low end of the range – probably in an attempt to allay shareholder fears that one more big earnings miss might drive Bayer away.
    • While it is relieving that MON is not heading for another quarterly miss, $4.40 this year compares with an expected $7.00 per share for this fiscal year 24 months ago.
    • Bayer is offering $125 per share for MON today – 28x this year’s earnings; an implied current EV/EBITDA multiple of 17.4x. A lower forward multiple but how much trust can be placed in estimates; this fiscal year saw an EPS decline of 30% over fiscal 2015.
  • Bayer is already offering a very full price for what could be a slowing or even declining business and MON shareholders should be concerned that MON plays just a little too hard-to-get and a $130ish per share opportunity becomes a $80 per share “go it alone” reality.
    • MON has seen substantial shareholder turnover over the last 6 months and 17 of the top 25 increases in holdings through the June quarter were hedge funds. Together they and other hedge fund owners account for around 40 million shares – roughly 9.0% of the stock.
    • The new group includes activist funds and MON will see a hostile response if this opportunity is lost. It is unlikely that current management would survive losing this deal.
  • Shareholders will have breathed a sigh of relief with the guidance – not because it was good, but because it was not so bad as to cause Bayer to walk, although that might be a tactic worth considering for Bayer unless things move a little faster.
    • Bayer has to be concerned about dilution – given weak numbers from MON and given the negative mood in the Ag space – MON estimates for 2017 and 2018 are not impressive.
    • Bayer’s current offer is 20x 2020 estimates for MON.
  • We think that this deal gets done at around $130 per share, so we would own MON, but in our judgement, the longer this drags on the greater the risk that it does not happen.

Exhibit 1

Source: Capital IQ, SSR Analysis

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