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.

Another day, another shuffle forward from Bayer in its attempt to buy Monsanto. The German life sciences group says it's willing to pay $127.50 a share for the U.S. seeds giant -- 4.5 percent higher than its initial pitch in May. It’s hard to avoid the impression that Bayer is hoping to tie up a deal at $130 a share. Monsanto's defenses are weak at these levels. But Bayer still has some serious work to do to justify this combination to its own shareholders.

The sweetener may not look overly generous at first glance. It does no more than adjust for developments since Bayer first approached Monsanto. The S&P 500 is up 6 percent since then and, in the absence of bid speculation, Monsanto would probably have performed slightly worse than the market thanks to disappointing first-quarter results.

Rising Market
The S&P 500 index has climbed since Bayer made its offer for Monsanto in May
Source: Bloomberg

The fact is the potential transaction looks as expensive as it did four months ago. Bayer has given no fresh information about its financial benefits, which in May it put at $1.5 billion annually three years after completion. The net present value of that didn't cover the $14 billion premium baked into the first proposal.

Bayer says its latest pitch was "in connection with a negotiated transaction". Having made it public, the German group would now struggle to go hostile with a lower number. Monsanto shareholders know it could afford to pay more. Equally, going hostile with a higher bid would damage Bayer’s credibility. Meanwhile, Monsanto is talking vaguely about other strategic options. But as things stand, Bayer's the clear front runner.

It all suggests an agreement between the two sides may not be far off. Monsanto opened its books for due diligence shortly after Bayer’s last raised proposal in July.

Upping Its Bid
Bayer has now raised its offer for Monsanto twice

That shows Monsanto’s directors think the price is in the right ballpark. It’s hard to disagree. While the agricultural science business is in a cyclical low right now, Monsanto would struggle on its own to get the shares to the levels being dangled by Bayer anytime soon. The stock’s three-month average is $106 -- reflecting a far lower standalone value plus a bit of upside for the possibility of a takeover.

If Bayer and Monsanto are inching towards an agreed deal at $130 a share, or $66 billion including assumed debt, Monsanto's shareholders will find it hard to resist. But Bayer’s will need some convincing.  Analysts at Bernstein see the current proposal delivering a return on investment of 6.5 percent, in line with Monsanto's cost of capital, only in 2022. What might change this calculus is if Bayer has found some magic beans in the due diligence. Its shareholders better hope so.

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

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