Monsanto – Left Out in the Cold?
SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES
Graham Copley / Nick Lipinski
November 17th, 2015
Monsanto – Left Out in the Cold?
As Monsanto takes visitors through its investor day this week, it does so in a very different environment than it has experienced previously. A story dominated for the last 15 years by innovation, high margins and industry leading growth, is now all about how to cope with a more mature market, fewer blockbuster innovations and potential/inevitable consolidation.
Monsanto has been the lead dog in the Ag seed and chemical pack for the better part of 20 years in one form or another, leading first with its “round-up” franchise and then with seeds. Innovation has been the driver, but the leadership of the company has always been strong and generally a step or two ahead of the competition. Monsanto’s bid for Syngenta was, in our view another first mover action which would have ensured the dominance of the company in the space going forward. In our view it was the recognition of a couple of new realities:
- Seed based innovation has reached a peak, in terms of the growth that can be generated from new traits relative to the commoditization and margin deterioration of the early victories. While this is a poor analogy, the low hanging fruit has been picked here.
- Seed innovation has not, as originally expected, removed the need for pesticides and the probable path to market share gains, or market share protection, in this business is to have a broad product offering to farmers including both seeds and chemicals.
A Syngenta/Monsanto combination would have been powerful, would have driven a great deal of earnings growth from cost synergies and possibly revenue synergies. It would have been a great deal for Monsanto, possibly the best combination for the company. The problem is that even if Syngeta was thinking about the need to consolidate at the time, which it may or may not have been, it is probably not the best combination for Syngenta.
As you look through the Ag space you can begin to pick better combinations, or optimal partnerships based on portfolios. There are two seed players – Monsanto and DuPont – so they cannot combine, but for most large Ag chemical producers DuPont probably looks like a better bet than Monsanto because of potentially higher revenue and cost synergies. However:
- Monsanto can afford to buy – wants Syngenta, could look at the German companies if they would sell
- DuPont cannot afford to buy but could do a JV
- DuPont, under its new leadership would likely rather be a seller, but the only deal that makes sense for DuPont along these lines is a reverse Morris Trust deal with Syngenta as it is unlikely that anyone else would pay up for DuPont’s business
- Dow is likely a seller – a good fit with DuPont and a less good fit with Monsanto; not a fit with Syngenta
- BASF is likely not a seller, could buy either Syngenta or DuPont or Dow, but it is unclear how value destructive such a deal would be and whether BASF would be the higher bidder
- Bayer could sell and become a pure play pharma/healthcare company. Monsanto is the only logical bidder here unless…
- The Chinese!!
What this shows is the many possible combinations and iterations that are out there and it backs up the comments from most companies that lots of discussions are taking place.
Now the game theory comes in to play.
- What will Syngenta do to avoid a sale to the Chinese? Syngenta now has to deal with someone
- What will Monsanto or BASF do to try and prevent a Syngenta/DuPont combination? This is the only deal for Syngenta which keeps the company independent in our view
- How does Dow maximize its value in a sale? Can a deal be engineered with DuPont where both companies benefit?
- Can any of the major players afford to sit on the sidelines?
These are much bigger issues for Monsanto this week than how many acres of corn will be planted in the US next year and when the Brazilian economy might start to recover.
We like Dow and DuPont here because we think they are the more likely sellers and/or will create a JV with huge cost synergies. We think there is risk in Monsanto as the company could either be forced to overpay for Syngenta or possibly Dow, or could be left out in the cold.