Deals

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

Monsanto shareholders may not relish the idea of giving up an all-cash takeover premium, but a purchase of BASF's agrochemicals business has some benefits of its own.

Such a transaction is back on the table, Bloomberg News reported late Wednesday, and Monsanto would likely issue shares in exchange for a business that generated $6.5 billion in revenue for BASF last year. The world's largest seedmaker is looking at alternative deals after hitting a roadblock in negotiations with its would-be acquirer Bayer over what it will take to open up its books. Monsanto rejected a $122-a-share offer from Bayer and the German chemical giant has yet to increase its bid.

Harvest Time?
Bayer is offering a decent premium, but what future value creation could Monsanto holders be giving up?
Source: Bloomberg

Bayer swooped in at a low point in the agricultural cycle when weak commodity prices are curtailing farmers' spending. This time last year, analysts on average were targeting $132 a share for a stand-alone Monsanto. Still, Monsanto may not be able to finagle a lot more money out of Bayer. For one, Bayer is already straining itself financially with the current bid and its shareholders haven't hesitated to express their disapproval. Second, Monsanto's growth trajectory has taken a turn for the worse. The company said last month that full-year earnings would come in at the lower end of its guidance and CEO Hugh Grant wasn't exactly effusive about his outlook for 2017.

Bayer may not be motivated -- or able --  to pay the $140 a share many analysts have cited as an appropriate Monsanto takeover value. So the question is, could a combination of Monsanto and BASF's agriculture businesses get to that kind of value down the road?

A transaction with BASF -- which gets a big chunk of its agricultural revenue from fungicides and herbicides -- would fulfill many of the goals Monsanto had when it kicked off the wave of consolidation in the agricultural industry with a bid for pesticide maker Syngenta (ChemChina eventually won that prize). Monsanto could develop its genetically modified seeds in tandem with the chemicals and market the two alongside each other. BASF’s plant-science unit has had a partnership with Monsanto since 2007, so the companies are also familiar with each other.

Some analysts were estimating as much as $1 billion in synergies in a Monsanto-Syngenta tie-up -- or about 3.5 percent of the companies' total combined 2015 revenue.  BASF's agricultural business is smaller than Syngenta's. But if Monsanto was able to get similar cost benefits out of a deal with BASF, that would work out to around $750 million. This is just a rough back-of-the envelope estimate but there is value to be created. And if you believe the agricultural markets will turn around and lift Monsanto's stock price down the road, a BASF tie-up could be a better bet.

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

  1. This doesn't back out Syngenta's seed business, which likely would have needed to be sold.

  2. This doesn't include BASF's plant-science unit. It's not clear if the division is part of the transaction.

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