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Deutsche Bank AG (USA) (DB) Trusts Monsanto to Agree for a Merger with Bayer

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Deutsche Bank believes Monsanto will accept Bayer’s offer at around $130 per share

Deutsche Bank’s research department recently released its report, where it covered the latest merger talks between Monsanto Company (NYSE:MON) and Bayer AG. The senior executives of these companies are currently on the negotiation table, where Bayer has raised the acquisition offer up to $65 billion ($127.50 per share).

The bank’s research analysts believes that as the negotiations are going on, the winner in this Monsanto takeover battle is likely to be Bayer AG (ADR) (OTCMKTS:BAYRY). In support, these analysts provided competitive analysis of this prospective merger with its peers.

According to them, even if Bayer bids up to $130 per share for Monsanto, it will reflect 16.2 times EBITDA for FY17. This is lesser than 16.8 times FY16 EBITDA upon which the state-owned China National Chemical Corporation (ChemChina) is acquiring Syngenta AG (ADR) (NYSE:SYT). In comparison to Syngenta, Monsanto contains far superior agricultural assets, as well as profit margins, return on capital and R&D pipeline.

Another aspect that was brought in the limelight was Monsanto’s digital farming platform. On August 17, 2016, Monsanto announced that its Climate Corporation segment is developing in-field sensors’ network. This will enhance the scope of weather, soil, and other data that flows in its digital agriculture tools. These tools ultimately help in increased crop yields with reduced costs.

Monsanto has invested around $2 billion in the development of Climate Corporation’s platform over 5-6 years. Even though its current cash flow is still negative, yet the incorporation of in-field sensors are likely to receive high attention in the agriculture segment. However, according to the research analysts, Bayer apparently did not incorporate its value in its aforementioned bid.

The third point that was brought into attention by the research analysts was that Bayer would be purchasing Monsanto potentially at or near the bottom of a challenging agriculture cycle. According to the recent forecast released by the US Department of Agriculture (USDA), US Net Farm Income would fall $71.5 billion, down 12% YoY. Moreover, it is down 42% from the all-time high record of $124 billion that it achieved in 2013 – the lowest level since 2009. Hence, it is more likely that the trend gets reversed from this point onwards.

Lastly, Monsanto’s closing price yesterday was $108.05 per share. This means that if it accepts Bayer’s offer of $130, it is still able to provide a premium of around $22 per share to its investors. Having said this, the research analysts also pointed out that given the heightened regulatory concern around agricultural combinations, Monsanto shares are likely to trade at a 12%-14% discount to any price agreed upon in the acquisition.

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