WSJ : Monsanto Rejects Bayer Merger Offer, Says It’s Open to Talks

Monsanto Rejects Bayer Merger Offer, Says It’s Open to Talks

Move by U.S. seed giant puts pressure on German pharmaceutical and chemical conglomerate to sweeten its takeover bid.

Monsanto Co. rejected Bayer AG’s $62 billion takeover offer as too low on Tuesday, but the biotech seed giant said it remained open to further deal talks.

The move, which was widely expected, puts pressure on the German pharmaceutical and chemical conglomerate to sweeten its offer despite protests from some of its investors. Those opposed to a tie-up fear that buying Monsanto would overload Bayer with debt or move the company deeper into agriculture at the expense of health care.

Monsanto Chief Executive and Chairman Hugh Grant said there could be “substantial benefits” to a deal, but the offer “significantly undervalues” the company and doesn’t address certain risks related to a deal, including potential financing and regulatory hurdles.

Monsanto’s board of directors unanimously viewed Bayer’s proposal as “incomplete and financially inadequate,” the company said, though it remained open to “continued and constructive conversations.”

A Bayer spokesperson said on Tuesday that the company would review and consider Monsanto’s response.

Bayer had detailed Monday its plan to buy Monsanto and add the U.S. company’s world-leading franchise in high-yielding crop seeds and genetic engineering to Bayer’s broad portfolio of insecticides and herbicides. A union would transform the agricultural sector, creating the world’s largest seed and crop-chemical supplier, and revamp Bayer itself, making agriculture about half of the company’s overall sales.

Bayer said its bid represented a 37% premium to Monsanto’s closing share price on May 9, a day before Bayer executives formally approached Mr. Grant about a deal.

Some Monsanto investors viewed Bayer’s offer, valuing Monsanto at $122 a share, as only the opening bid. They have said Bayer’s bid didn’t much improve on Monsanto’s late-June share price of about $121, shortly before Monsanto announced a $10 billion stock-repurchase program that signaled to traders that the company thought its shares were a bargain at that price.

Others noted that Swiss pesticide and seed developer Syngenta AG commanded a larger premium in its agreed-upon sale to China National Chemical Corp. in February.

Declining prices for major crops over the past three years have built pressure on the global companies that sell fertilizer, seeds and tractors to farmers, who have seen their incomes dwindle alongside grain prices. The U.S. Department of Agriculture has projected that U.S. farm incomes this year will fall to their lowest level since 2002.

“The critical thing here is that Monsanto’s not in a distressed situation,” said Joel Ray, director of research with Davenport Capital Management LLC, which owns Monsanto shares. “You’re currently at the bottom of the ag cycle, and the net result is that valuations are depressed because of that.”

Monsanto executives have touted the company’s pipeline of new seeds and crop sprays, and so far have maintained a target of doubling 2014 earnings per share by 2019, despite the downturn in the agricultural sector. “There’s no doubt that fiscal year 2016 is challenging, but we will emerge as a leaner, stronger organization,” said Brett Begemann, Monsanto’s president, last week at an investor event.

Jonas Oxgaard, analyst with Sanford Bernstein & Co., wrote in a note to clients that Monsanto executives likely do not want to sell the company at any price.

“Monsanto’s mentality of being the visionary trailblazer, along with its track record proving it can do so successfully, have likely convinced the company that any change of control should be viewed negatively and avoided,” Mr. Oxgaard wrote. He estimated that given Monsanto’s lineup of anticipated new products and its profit projections, the company could reject “any price below $140” as not delivering enough of a premium to sell.

Monsanto shares climbed 2.7% in afternoon trading to $108.90. Bayer shares settled 3.2% lower in European trading.

NYT : Delaware Effort to Protect Shareholders May End Up Hurting Them

Delaware Effort to Protect Shareholders May End Up Hurting Them

An overhaul in shareholder rights is coming as the Delaware Legislature seeks to curtail a strategy that has grown popular with hedge funds. The question is whether shareholders or companies will benefit.

Right now, shareholders of a company that is the target of a corporate takeover can protest the price being paid by petitioning a court to appraise the value of their shares. The court will order the merged company to pay the shareholders fair value, which may be greater or less than the amount paid in the deal, plus any interest that accumulated during the court’s deliberation, which often takes years.

Appraisal rights originally came to be as a compromise. Mergers used to require the approval of 100 percent of shareholders. That gave power to shareholders who wanted to block deals by being holdouts. Appraisal rights were adopted to reduce the minimum deal approval threshold to a majority. That way, a shareholder could dissent from the takeover but not stop it.

The ability to exercise appraisal rights has always been convoluted and difficult, however. In Delaware, appraisal rights are usually available only if the deal price is paid in cash, not stock. This means there are ways to avoid setting off appraisal rights. Remember Bear Stearns’s acquisition by JPMorgan Chase in 2008? JPMorgan paid for the deal with stock instead of the measly cash amount it could have used, avoiding appraisal rights.

Exercising appraisal rights can also be risky for shareholders. If the court found that the acquirer had overpaid, the shareholder seeking the appraisal would receive less than other shareholders got in the deal. And lengthy court proceedings required costly experts to opine on the fairness of the price.

Because of these issues, shareholders seldom exercise appraisal rights.

That all changed after a case in Delaware eight years ago made it easier to exercise appraisal rights and incited a boom in appraisal arbitrage, a strategy in which a fund buys shares just before a merger closes in order to exercise the appraisal rights. Hedge funds like Merion Capital, Merlin Partners and Quadre Investments arose specializing in the strategy.

This was a problem for companies incorporated in Delaware, and thus the overhaul efforts began.

A proposal last year in Delaware limited appraisal rights to holders of $1 million or more of a company’s stock or 1 percent of the outstanding shares, whichever was less. Another proposal also took aim at the accumulated interest by allowing companies to prepay the acquisition amount and eliminate interest accrual.

These proposals died in the Legislature last year as a debate erupted over whether they went far enough or too far in limiting appraisal. They were revived this year, and they just passed the Delaware House of Representatives. They appear destined to become law.

The question is what effect these changes will have on appraisal rights. In a just released study, four professors, including Wei Jiang at Columbia University and Randall Thomas at Vanderbilt University, looked at past appraisal actions to predict what would happen.

First, the authors found that hedge funds dominate appraisal cases. Actions by hedge funds make up three-quarters of the volume measured by dollars for appraisal actions in the last few years. Seven funds accounted for a majority of this volume.

Second, the study found that appraisal cases seem to serve some corrective function. Appraisal rights are exercised more often when there is a conflict with shareholders, as in a management buyout or private equity deal, or when there is a lower deal premium.

Finally, the professors found that if past filing patterns hold, the new appraisal rules would significantly restrict appraisal actions. The authors predict that the $1 million minimum will knock out a quarter of these actions. And allowing for an interest rate cutoff could eliminate another significant number of filings.

These changes are on top of a court crackdown that also limits investors seeking appraisals by setting the price paid by the acquirer as the amount to be awarded in an appraisal proceeding unless it can be shown that the sale process went awry.

The proposed changes may backfire, however. Rather than discourage appraisal petitions, the elimination of interest accrual through prepayment may actually spur more appraisal actions because hedge funds would be paid sooner and be able to use that money to bring more appraisal actions.

In addition, the $1 million minimum seemingly unfairly knocks out small shareholders but not professional hedge funds. There should be a remedy for a small shareholder who feels ill-treated.

Perhaps more important, legislators have not assessed whether the proposals uphold the intent of appraisal rights, which was to protect shareholders. In Delaware courts, it is hard to challenge a deal that was negotiated with good process. Appraisal rights could be the only remedy for shareholders in deals that did not have a great price. Absent the threat of appraisal proceedings, buyers and sellers might lose the incentive to pay a fair price, instead paying a price that was just high enough.

The overhaul also do not fix the problems with appraisal actions, either. They are still not available for stock deals, allowing companies to bypass this option easily. There will still be battles in court over the price of a deal in front of judges who are not trained in these issues. And these revisions may not even deter hedge funds from exercising appraisal rights, the ostensible impetus for these changes.

All of this speaks caution. After all, it seems funny that now that shareholders want to use appraisal rights, there is a push to try to end it. Does that seem right?

>>> MON/BAYN GR - initial thoughts on MON release

MON/BAYN GR   MON Response to BAYN GR Proposal - No surprise with the fairly straightforward statement from the company with the value being inadequate but open to "continued and constructive conversations". MON is not opposed to a deal but the price has to be right and the antitrust risk addressed more completely. We believe that MON would trade at a large discount if a definitive deal is announced - SYT current has an ~18% gross spread. Assuming a $135/share deal price, 4 dividends ($0.54 each) and a 16%-20% gross spread, MON would trade at $114.75-$118.50 for on deal announcement. Normalized for the dividend, the gross spread would be 13.9%-17.7%.  This implies a 55%-63% deal probability using a $90/share downside price (15.1x P/E multiple of 2017E $5.91 EPS).

 

DISCLAIMER

This information represents neither an offer to buy or sell any security nor, because it does not take into account the differing needs of individual clients, investment advice.  Those seeking investment advice specific to their financial profiles and goals should contact their Oscar Gruss & Son Incorporated sales representative.  Oscar Gruss & Son Incorporated believes this information to be reliable, but no representation is made as to accuracy or completeness.  This information does not analyze every material fact concerning a company, industry, or security.  Oscar Gruss & Son Incorporated assumes that this information will be read in conjunction with other publicly available data.  Matters discussed here are subject to change without notice.  There can be no assurance that reliance on the information contained here will produce profitable results.  A security denominated in a foreign currency is subject to fluctuations in currency exchange rates, which may have an adverse effect on the value of the security upon the conversion into local currency of dividends, interest, or sales proceeds.  The value of securities and depositary receipts of foreign issuers that are denominated in United States dollars are also influenced by fluctuations in currency exchange rates.

© 2016 Oscar Gruss & Son Incorporated.  All rights reserved.

 

DISCLAIMER This information represents neither an offer to buy or sell any security nor, because it does not take into account the differing needs of individual clients, investment advice. Those seeking investment advice specific to their financial profiles and goals should contact their Oscar Gruss & Son Incorporated sales representative. Oscar Gruss & Son Incorporated believes this information to be reliable, but no representation is made as to accuracy or completeness. This information does not analyze every material fact concerning a company, industry, or security. Oscar Gruss & Son Incorporated assumes that this information will be read in conjunction with other publicly available data. Matters discussed here are subject to change without notice. There can be no assurance that reliance on the information contained here will produce profitable results. A security denominated in a foreign currency is subject to fluctuations in currency exchange rates, which may have an adverse effect on the value of the security upon the conversion into local currency of dividends, interest, or sales proceeds. The value of securities and depositary receipts of foreign issuers that are denominated in United States dollars are also influenced by fluctuations in currency exchange rates. © 2016 Oscar Gruss & Son Incorporated. All rights reserved.

FT : Monsanto opens door to talks on Bayer bid

Monsanto opens door to talks on Bayer bid

Monsanto is open to discussions on a deal with Germany’s Bayer, the US seeds giant said for the first time on Tuesday, even as it rejected a record-breaking $62bn bid from the aspirin-to-weed-killer conglomerate as “incomplete and financially inadequate”.
Hugh Grant, Monsanto’s chairman and chief executive, said in a statement that the US company believed in the “substantial benefits” of a combination that would create a group spanning seeds to crop sprays.

Monsanto’s price-focused rejection and willingness to engage with Bayer is the strongest indication to date that the US company is open to a deal on the right terms. This marks a significant shift in its thinking: until March it appeared completely opposed to being taken over by the German group.
Mr Grant argued, however, that Bayer’s $122 a share proposal “significantly undervalues our company” and did not adequately address some of the “potential financing and regulatory execution risks related to the acquisition”.
Monsanto shares were little changed by the statement, trading up 2.3 per cent to $108.60 at lunchtime in New York. Investors still see substantial hurdles to getting a deal agreed and cleared by antitrust regulators, and Mr Grant said Bayer had yet to fully address “potential financing and regulatory execution risks”.
Bayer will now be under pressure to sweeten its offer, a move which risks further antagonising shareholders concerned that a Monsanto takeover will strain Bayer’s balance sheet.
In explaining its move for Monsanto, Bayer said it risked missing out on the final wave of consolidation in the global agrochemicals sector if the deal failed.

Werner Baumann, Bayer’s new chief executive, said the business of supplying seeds and crop chemicals to farmers was already dominated by six players who owned nearly two-thirds of the market. Consolidation would, he said, lead to even bigger and more powerful companies.
“The ones that are left have to decide now what they want to be in this industry . . . because this [consolidation] is going with its own dynamic,” he told the Financial Times during a visit to London. “All the major players have to define their position in this last round of consolidation.”
The stopover was part of a multi-city charm offensive by Bayer to win support from shareholders as it pursues a deal that now looks set to cost it more than $62bn including debt. The German company’s share price has fallen back by more than 10 per cent over the last week as investors balk at the potential cost of a deal.
While Monsanto is pushing for a higher offer, Mr Baumann said that he has been in “constant dialogue” with Mr Grant since sending an offer letter on May 10.

He said: “It’s actually very open and easy to get each other on the phone . . . I can only speak for myself, but you would sense if there was tension.”
Mr Baumann met Mr Grant and Brett Begemann, Monsanto’s president, in St Louis in mid-April. He said the two executive teams were “fully aligned” on how to address changes in the industry.
The agribusiness industry has been swept by takeover fever since Monsanto, a leader in genetically modified seeds, failed to buy its Swiss crop chemicals rival Syngenta. The move set off a chain reaction — ChemChina announced a $43bn deal for Syngenta while Dow Chemical and DuPont have agreed a $130bn mega merger.
Bayer has faced sharp criticism by some investors over its move on Monsanto, amid concerns over the amount of debt it will have to raise to finance the deal. One London-based investor said: “It is a compelling strategic fit, but when it comes to capital allocation I think management have lost their minds.”
This person said: “I don’t see the hurry. The last Monsanto results were hardly knockout. There is plenty of time for the corporate hubris [from the Syngenta/Dow/DuPont deals] to wind down.”

Mr Baumann said many of his shareholders saw the strategic logic, but acknowledged that he had seen pushback from investors. Some shareholders focused on the healthcare sector have told the company that they did not want to be invested in a business that is cyclical like agriculture, he added.
He said that in consumer healthcare, Bayer was in the still in the process of digesting some of the acquisitions it had made over the past few years. In pharmaceuticals, he said that the patent cliff for the company’s two most important drugs was still several years away.
“What is important is that our pharma . . . has access to operating expenses, sufficient R&D, sufficient marketing and development to drive the business,” he said.