Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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

Monsanto isn't doing much to help itself get a higher bid out of Bayer.

The U.S. seed giant reported quarterly results on Wednesday that missed analysts' estimates. On top of that, it said full-year earnings would come in at the lower end of its guidance. That's a pretty poor showing as far as takeover defenses go.

Restarting the Engine
Monsanto is on track to return to revenue growth by fiscal 2017, but even then the potential increase is smaller than in years past.
Source: Bloomberg

Hugh Grant, Monsanto's CEO, sees a combination of positive and negative factors (new soybean technologies and improving corn prices, but declines in weedkiller prices) that overall lead him to be less sanguine about the company's 2017 outlook. Normally, companies on the receiving end of an unsolicited bid unveil super-bullish profit targets that nudge brokers to push up their stock-price estimates, generating more momentum and a higher takeout value.

The numbers are what they are. If anything, they are a reminder that this is a low point in the agricultural cycle and investors need to think about the future value they would be giving up in accepting a takeover proposal.

Other Alternatives, You Say?
Monsanto shares climbed after it said it was talking to others besides Bayer about deal options.
Source: Bloomberg
Intraday times are displayed in ET.

Monsanto also made a point to toot its own horn as a "partner of choice" that's having conversations with companies besides Bayer about possible deal alternatives. These may include tentative proposals about bids for the whole firm, joint ventures -- or even opportunities for Monsanto to strike some takeovers of its own. It's clear from Monsanto's comments that the $45 billion company's best chance of getting a top price out of Bayer is to get an auction going.

Shares of Monsanto ticked up as much as 3.4 percent following its earnings release and outpaced the gains for the broader market. The share pop is likely the result of investors pricing in a higher chance of some sort of deal taking place, rather than expectations for a knockout price.

A cracking set of numbers would have given Bayer a justification to raise its offer -- something Monsanto wants before it opens its books. But as it is now, Bayer's only impetus for doing so is fear that Monsanto might do a deal with Bayer's German rival BASF instead.

Bayer, which has put forth a $122-per-share proposal for Monsanto, will not be quaking at this threat. BASF has signaled it doesn't feel any pressure to get into a Monsanto bidding war. It could always change its mind, but acquiring Monsanto would require the German giant to issue equity -- something that's historically not been part of its playbook. Besides, it's not like this is a new possibility.  Everyone has been talking to everyone in this industry. Monsanto simply repeating that fact does little to up the ante.

Bayer itself shouldn't rule out the idea of alternatives with Monsanto, such as a joint venture or other partnerships. But it may now have grounds to push for due diligence by offering provisions for a breakup fee and regulatory assurances -- as opposed to a higher price.  

Should the German company push ahead with its takeover, it will have an even tougher job defending its bid to its own (already skeptical) shareholders. It was always going to take several years for the current proposal to earn its cost of capital. With Monsanto's growth trajectory slightly worse than thought, a deal by Bayer would take even longer to pay off for its shareholders.

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

To contact the authors of this story:
Chris Hughes in London at chughes89@bloomberg.net
Brooke Sutherland in New York at bsutherland7@bloomberg.net

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