Monsanto Trading Below Bayer Bid Shows Regulatory Concerns

Here's Why Bayer Would Be Overpaying for Monsanto
  • ‘There seems to be some real skepticism over the deal’
  • Monsanto trades as much as 13% below $122 per-share offer

Monsanto Co. traded as much as 13 percent lower than Bayer AG’s $62 billion takeover offer amid investor concern that regulators may block a deal that would create the world’s biggest seller of seeds and farm chemicals.

Monsanto closed at $106 in New York trading on Monday, up 4.4 percent for the day, after Bayer earlier disclosed its $122-a-share offer. Chris Shaw, an analyst at Monness Crespi Hardt & Co., said he’s surprised the shares didn’t react more positively.

"There seems to be some real skepticism over the deal, likely due to the increased scrutiny recent mergers have received," he said in a note.

While Leverkusen, Germany-based Bayer said it doesn’t see major regulatory risks to its proposed takeover, the offer nevertheless may intensify worldwide scrutiny of the megadeals that would consolidate the crop-chemicals industry. Regulators are examining the proposed $130 billion merger between Dow Chemical Co. and DuPont Co., while national security officials in the U.S. are weighing China National Chemical Corp.’s bid to acquire Syngenta AG of Switzerland.

No Response

While the combination of Bayer and Monsanto makes sense operationally, it’s not clear yet how regulators will view this or other deals in the industry, said James Govan, a fund manager at Baring Investment Services Ltd. in London, who manages about 60 million pounds ($87 million) of agricultural and food-related stocks, including Monsanto shares. If they focus on the size of overall market share, as opposed to individual product categories, it may be harder for the deals to go through, he said in an interview Monday.

St. Louis-based Monsanto has yet to respond to Bayer’s offer. It’s not unprecedented for a target company to trade at less than an offer before the deal is later completed successfully. The current premium of Bayer’s offer to Monsanto’s share price ranks 20th out of 143 live deals tracked by Bloomberg.

Bayer’s offer is probably less than Monsanto’s valuation of itself, as the U.S. company expects significant growth between 2020 and 2025, said Jonas Oxgaard, an analyst with Sanford C. Bernstein & Co. in New York. Oxgaard said he expects an offer of $135 to be more palatable. Even then, he said, Monsanto would be reluctant to agree on a deal.

“Monsanto doesn’t want to be bought,” Oxgaard said by phone. “They have a history of being a standalone company, very focused long term, and they consider themselves the best company in the industry. It rankles a bit to be the best and then be acquired.”

Bayer’s offer represents a 37 percent premium to the May 9 closing price, and would be funded with a combination of debt and equity, including about $15.5 billion coming from selling shares to existing investors.

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