Monsanto – “A Bird In The Hand” – Hit The Bid – Now!

gcopley
Print Friendly
Share on LinkedIn0Tweet about this on Twitter0Share on Facebook0

SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

July 19th, 2016

Monsanto – “A Bird In The Hand” – Hit The Bid – Now!

  • We think that the current Bayer offer for Monsanto is as good as it is going to get and that MON would be taking a huge risk for its shareholders by delaying – either to push for more or looking for an alternative.
    • The Ag market is not strong – corn prices have declined again.
      • Productivity gains, especially in China post a successful ChemChina/Syngenta deal could keep the market oversupplied and prices low for years.
      • Earnings are declining for MON and others: steep revisions over 18 months; 2017 estimates suggest downside. Risk in assuming that estimates can be achieved.
      • Potential commoditization of the market is a risk for MON – the Bayer bid is not.
    • The price is right.
      • Pricing would suggest that there is less than a 50% chance of the deal happening so there is significant upside should Monsanto accept. We think the odds are higher.
      • Bayer is taking on regulatory and currency risk and is unlikely to see much logic in paying much more than is currently offered.
      • Possible forward valuations for MON based on revised estimates do not offer enough upside in our judgement to beat $125 or an increment higher today
    • If MON drags its feet, Bayer’s best tactic would be to pull the bid.
      • In our view MON’s stock would drop significantly with such a move and while Bayer might be persuaded back to the table, at that point Bayer will hold all of the cards and the price will likely be lower.
      • Time is not on MON’s side – news flow from Europe and the Ag market is negative and has more risk to the downside than the upside in our view.
  • The risk would be that the BASF interest is real – in which case MON might have a chance of a higher price, but if this drags out, a Bayer exit before a BASF entry could cause extreme volatility in MON’s share price.
    • We do not believe that MON can construct an argument for its shareholders that is better than taking the offer on the table.
  • We would be long MON.

Exhibit 1


Source: Capital IQ, SSR Analysis

Valuation

MON traded in the $90 per share range for much of the early part of the year – while EPS estimates were around $5.20 for 2016 and $6.33 for 2017. Since then estimates have fallen by 16% for 2016 and 26% for 2017. Over the same period the market (S&P500) has risen by 11%, so we can argue that absent any deal, MON should be 5-15% lower than in Q1 – $76-85 per share. At the low end that would be 15x multiple of 2017 estimates. This is a poor multiple for a company with MON’s historic growth but a good one if things have changed and earnings are threatened further or stagnating – i.e. if there is further downside risk to 2017 and 2018 estimates.

Estimates for 2020 are $6.24 – a 20 multiple gives you $125 per share, so you can wait until 2020 and hope for a high multiple or you can take the cash today!

Exhibit 2

Source: Capital IQ, SSR Analysis

Exhibit 3


Source: Capital IQ, SSR Analysis

Fundamentals

Corn pricing rallied briefly this year but responded very negatively to the expected acres planted projections for the US and has effectively round-tripped. The higher acres planted may be good for seed and fertilizer sales, but the round trip in corn pricing does not give farmers a lot of money to buy expensive seeds and gives seed and chemical sellers limited if any pricing power. Soy pricing is also off its recent peaks.

Exhibit 4

Source: Capital IQ, SSR Analysis

Exhibit 5

Source: Capital IQ, SSR Analysis

Risks

We believe that the risks for Bayer are not insignificant given the uncertainty in Europe and any news cycle could encourage the company to withdraw the bid, especially since Bayer shareholders are vocally against the deal – incorrectly in our view. If MON hold out for more or drags its feet, this offer could disappear quickly. We believe that Bayer is committed to the deal but these are the warnings signs we would look for and there are indications of both at the time of writing.

  • The biggest risk for Bayer would be a currency risk, should Europe fall into a recession or further rifts appear in the Union. We would expect to see Euro weakness on any further European political uncertainty.
  • The second risk would be that the Ag trends we have seen for the last 18 months continue – corn and soy surpluses – increased planting – better yields etc. Even with the synergies from the deal and the expected benefits of combining seed and chemical sales, there would come a point where a negative view of the fundamentals would cause Bayer to withdraw.

©2016, SSR LLC, 1055 Washington Blvd, Stamford, CT 06901. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

Print Friendly