Deals

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

Bayer may look like it's been inhaling some of its own chemicals, given its mammoth cash bid for Monsanto. But for the target, the proposal doesn't look entirely crazy.

The German suitor is offering $122 a share in cash, or about $62 billion including debt, for the U.S. seed giant. The questionable wisdom of such a financially straining bet has been well-documented, not least by the German aspirin inventor's slumping shares.

From Monsanto's perspective, though, a buyout with a decent premium might not be so bad, especially with the agriculture industry mired in a slump and rivals striking big mergers.

Not Too Shabby
Bayer's offer isn't too far off from Monsanto's post-financial crisis high of about $127.
Source: Bloomberg

Monsanto is still reviewing Bayer's proposal, submitted two weeks ago. The lack of an outright rejection -- usually swift for proposals that dramatically undervalue targets -- is interesting. That could signal willingness to negotiate. Bayer's first proposal may not clinch a deal, but it's nothing to sneeze at. 

The 37 percent premium just about gets investors back to Monsanto's post-financial crisis high and more than makes up for the share price drop over the past year as slumping crop prices forced farmers to cut spending.  Bayer's bid is also one-fifth higher than where analysts saw Monsanto stock going on its own in 2016.

At about 16 times Monsanto's projected Ebitda for 2016, the proposal implies a lower valuation than that commanded by Syngenta in its $46 billion sale to ChemChina.

There's an argument to be made that Monsanto deserves a higher multiple because it has better growth prospects and margins. But Syngenta's situation was different in that it's being bought by a state-backed Chinese giant with seemingly limitless firepower. No rival suitor could compete, including Monsanto.

As such, the Syngenta deal was expensive at almost double the median Ebitda multiple for similar-sized chemical transactions in the last decade. Dow and DuPont's stock swap, by comparison, gave shareholders virtually no premium.

Bayer will almost certainly have to sweeten its bid, but it's not clear by how much. Estimates range up to $150 a share. There may be room to meet in the middle, or find an alternative structure. A small equity component, for example, could allow Monsanto investors to share in any upside from a stronger consolidated company (it certainly won't be easy for Bayer to put much more cash on the table).

It's not as if the strategic logic will be alien to Monsanto boss Hugh Grant. He started this wave of industry mega-deals by targeting Syngenta and touting the benefits of pooling R&D and combining crop chemical and seed expertise. While Monsanto may prefer to be an acquirer, there are few opportunities left for a big deal.

The Perks of Teaming Up
A combination of Bayer and Monsanto would create an agricultural giant.
Source: Bloomberg
Data reflects Bayer and Monsanto's combined agricultural-related revenue in 2015 and Dow and DuPont's pro-forma agricultural sales, as reported on March 1. Syngenta-ChemChina data is a rough estimate based on Syngenta's 2015 revenue and ChemChina's agrochemical sales in 2013, the latest year for which data is available.

Indeed, one of the best takeover options still out there for Monsanto is a purchase of Bayer's crop-science unit. Submitting to a Bayer takeover instead would be another way to get a bite at the same apple -- arguably under better terms.

As Gadfly colleague Chris Hughes notes, the $1.5 billion in cost and revenue synergies cited by Bayer fall  short of covering the premium it's offering -- meaning much of the value would go to Monsanto shareholders. Bayer shareholders aren't very happy about that, but that's not Monsanto's problem.

Lack of Support
Bayer investors have sent the company's shares down to their lowest price since 2013 on news of its bid for Monsanto.
Source: Bloomberg

The odds of Monsanto getting a counter-bid from BASF are low because that German giant would have even greater financial constraints than Bayer. While Monsanto could try to bid for BASF's agri-business, the chemical maker doesn't seem interested in selling.

So with few alternatives out there, the Bayer approach has some merit for Monsanto. The seeds of the idea shouldn't fall on stony ground.

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:
James Boxell at jboxell@bloomberg.net