Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

A Syngenta takeover makes sense for Monsanto. Getting into a bidding war doesn't.

Monsanto is considering making another run at the Swiss pesticide maker after several previous takeover approaches came to naught. The seed giant's most recent pursuit of the $35 billion company ended in August when Monsanto withdrew a cash-and-stock bid of 470 francs per share that Syngenta had rejected as too low.

Some things are different this time around. For one, Syngenta shareholders have made clear they weren't thrilled that management didn't engage more with Monsanto -- so much so that CEO Mike Mack quit last month amid mounting criticism. Monsanto may find Syngenta is now a more willing seller. Its attitude toward a deal already seems to be changing: while Syngenta rebuffed a 449 franc all-cash bid from China National Chemical, it's at least talking with the suitor.

One thing that shouldn't change is Monsanto's refusal to overpay.

Syngenta is the ideal target for Monsanto. A takeover would would allow the company to develop its seeds in tandem with the world's largest crop-chemical portfolio and market the two alongside each other. Deutsche Bank earlier this year estimated a combination could yield as much as $1 billion in synergies on top of cost cuts Syngenta is already undertaking. So the math on a takeover looks really attractive. In fact, Monsanto could offer 500 francs, or even 600 francs for that matter, and still seal an accretive deal, according to data compiled by Bloomberg.

But just because Monsanto can pay more, doesn't mean that it should. Going much higher than its previous bid starts to look questionable, said Tim Beranek, a principal at Monsanto shareholder Cambiar Investors.

The 470-franc offer in August already implied a valuation for Syngenta that was above the average for comparable deals. It was also a higher price than the company had ever reached on its own -- or is likely to anytime soon.

How Much Is Enough?
Shares of the pesticide maker have never traded above 450 Swiss francs.
Source: Bloomberg

And the outlook for Syngenta's business has gotten worse, not better, since Monsanto walked away.

Ex-CEO Mack's efforts to boost sales by grouping Syngenta products by crop lines have so far failed to impress. Lower demand for crop chemicals is depressing sales and currency pressures aren't helping. The company is on track for its first revenue decline on a U.S. dollar basis since 2009. Sales and profit projections for 2016 and 2017 have also come down.

For Better or For Worse
Lower commodity prices have dimmed the outlook for Syngenta's business

What reason does Monsanto have to offer more money?

It does have some competition in ChemChina. Backed by a Chinese government that's hungry for food security, ChemChina may not be as limited by economics. That's a tough -- and dangerous -- rival to try to beat. Plus ChemChina can offer all cash, something Monsanto can't do. It probably doesn't want to lose Syngenta to ChemChina, but the cost of fighting for it may be too great.

That's especially the case because Monsanto now has more obvious alternatives than it did even three months ago. Dow has been more open about its willingness to sell its agriculture business, while DuPont's new CEO has held talks about doing something with his seeds and pesticides unit. Neither is on par with the size of Syngenta, but the businesses are attractive -- especially at the right price.  

In a year when valuations have been anything but rational, Monsanto would serve its shareholders best by standing firm. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net