TheChek News Flow

Gapping up
In reaction to strong earnings/guidance: NPTN +26.6%, SEDG +15.6%, IMPV +11.9%, WPRT +10.8%, CALA +10.3%, SSNI +9.8%, PLPM +9.7%, HNSN +8.3%, DATA +7.8%, DATA +7.8%, STMP +7.1%, RMTI +6.9%, VICL +6.7%, XOMA +6.4%, AERI +6.1%, OUTR +5.6%, SAAS +5.5%, FUEL +5.5%, BKD +5.3%, AOL +5%, BITA +4%, MOH +3.9%, NUAN +3.5%, GSAT +3.5%, RLYP +3.5%, CYBR +3.4%, ACAD +3.3%, RYI +3.3%, ACET +3%, BONA +2.9%, RBA +2.9%, SWIR +2.8%, ALSK +2.7%, CPXX +2%, PGH +2%, AIRM +1.9%, TRAK +1.9%, CUTR +1.1%, RGLS +1.1%, GSVC +1.1%, CBS +1%, TRUE +1%, AEZS +1%, KTOS +0.9%, CNAT +0.7%, JMBA +0.5%, ESPR +0.5%, NRG +0.5%

M&A news: SYT +11.2% (reports that co may be acquired by Monsanto (MON)) MCRL +3.7% (Micrel to be acquired by Microchip Technology (MCHP) for $14.00 per share)

Select large pharma related names showing strength: SGEN +3.8%, AZN +3.5%, GSK +3.1%, SHPG +3.1%

Select oil/gas related names showing strength: RDS.A +2.6%, BP +2.2%, TOT +2.1%, SDRL +1.1%, XOM +0.7%

Other news: WLT +27.1% (confirmed last night it will make interest payments, continue discussions with debtholders), GEVO +20.3% (cont strength), MNGA +19% (announces that a major cement company in the U.S. has approved MagneGas fuel to replace acetylene and has placed their first order for a location in Florida), NVGN +14.5% (move being attributed to press release regarding the presentation of positive pre-clinical date for TRXE-009 for the treatment of brain cancer), NDRM +14.2% (announces the FDA has lifted its clinical hold on ND0612 candidates, after a review of additional information related to the product candidates' delivery devices), ICLD +11.3% (announces that its cloud team has been engaged by a large east coast auto parts distributor and wholesaler to design, migrate and implement a cloud solution), SCMP +6.1% (announced that the FDA has granted Fast Track Designation for Cobiprostone, for the prevention of oral mucositis), TOUR +4.9% (announces $500 mln investment from a group of investors), AMRN +3% (discloses lawsuit against the FDA seeking a judicial declaration that an FDA regulation limiting off-label promotion is unconstitutional ), ERIC +2.6% (asserts patents against Apple (AAPL) in Germany, the UK and the Netherlands), NOK +1.3% (seeing reports that Uber has joined in bidding for co's maps unit; bidding up to $3 bln), LYB +1% (announces a new share repurchase agreement for up to 10% of its shares; increases quarterly dividend to $0.78/share from $0.70/share), BIIB +0.8% (announces Board authorization for a $5 bln share repurchase program, in addition to its existing 1.3 mln share authorization )

Analyst comments: ALU +3.8% (upgraded to Buy at UBS), BABA +1.1% (upgraded to Buy from Neutral at Goldman), IVR +1% (upgraded to Outperform from Mkt Perform at Keefe Bruyette), PM +0.8% (upgraded to Neutral from Sell at Goldman) 

                Summary

 

·         The Index posted a bullish price action yesterday and managed to remain within the boundaries of the rising channel.

·         Yesterday low was at the 38.2% Fibonacci retracement level of the move from the 2,921 low to the 3,836 high

·         Also, from an Elliot wave perspective, yesterday low could end up being the bottom of wave 4. If this was the case one should expect a minimum move higher towards the cycle high at 3,836.

 

Strategy: Buy at mkt, target 3,830 with a stop at 3,480 (daily closing basis)

 

 

Daily chart

 

 

Monsanto (MON US) for Syngenta (SYNN VX)

Unsolicited approach PDF attached

Last night in a Bloomberg exclusive out of the US Desk, reporter Ed Hammond with help from Matthew Campbell broke news that Monsanto had offered CHF450 per Syngenta.

Syngenta this morning, then confirms that it has received an unsolicited proposal from Monsanto to acquire the company at an equivalent CHF449 per Syngenta share (45% in cash + 55% MON stock)

We are positive on this potential deal. At present we believe consensus may underestimate the chance of this deal going firm. US/Europe mergers continue to increase, inversions are still possible, European target CEO’s are aware that after years of dry corporate activity the window for acquisitions is open and comes with management incentives. Antitrust, tax and politics make this deal difficult but Monsanto must know there are difficulties in a Syngenta integration. MnA bankers and lawyers will want to make sure more mega deals come true and tread with care.

Treading with care means managing the flow of information. Leaks in mega takeovers are hard to keep contained. It is a better strategy for the bidder one would argue, to take control of the news flow, to leak the news first as a rumour and prepare the target shareholders for what is to come. We note the media reports are very detailed in scope.

Such leak/ media news from Bloomberg US could indicate that Monsanto is the pre-emptive party.  In prior deals this dynamic is positive. The opposite (when it is the target leaking the news), sometimes means that the target’s board is of one unified rejecting mind. If we are reading this right, and it is Monsanto’s side leaking the news, then it allows resistant Syngenta board members or influential shareholders to talk, remain in control and prepare a response based on commercial interest. Syngenta indeed replies “The offer fundamentally undervalues Syngenta's prospects … we are targeting savings of $1 billion in 2018”

On that sense, the approach at CHF449 is a good starting point. The cash and stock potential offer means the actual offer value depends on how Monsanto performs but an indicative CHF449 price would be about CHF100 higher than the recent most bullish analyst fair value of CHF320 and some 30pct premium to Syngenta’s prior 3 years Ev/Sales and EV/Ebitda multiples.

Syngenta says they expect $1bn (CHF922m savings by 2018), if those were the only synergies available we could NPV using 7pct for an equivalent CHF141 per Syngenta share. One then can add CHF141 to the undisturbed Syngenta value of CHF332.7 and interpret the $1bn savings claim as Syngenta saying they won’t accept anything less than CHF473 per share (CHF141 + CHF332).

In addition to cost savings inversion could be incremental to earnings. Syngenta’s effective tax is under 20pct while Monsanto’s is some 8 points higher. The approach 55pct in stock comes with sufficient share component to qualify as an inversion deal.

A share component of such size is also a put option for the bidder because Monsanto shareholders would need to vote to approve the merger.

This could mean that the bidder may say inversion is not the reason for the deal and there may not be any tax change condition in the documents, but since the bidder shareholders can vote down the acquisition, the effect is the same- a put option with the result of a wide deal spread (currently 17pct).

We note however that the cross ownership Syngenta & Monsanto (ie those funds who have both companies in their portfolios) is large and the offer price seems a good starting point which could still increase.

Politics may also play a part because Europe has not embraced genetically modified crops (GM) the way North America has and Monsanto is a name associated with GM crops.

Counter bidders have been mentioned as Dow, Basf and even ChemChina. Of those the one with inversion potential is Dow, a company with cash held abroad and very similar market cap and very similar effective tax rates to Monsanto.

Basf, ChemChina and others would qualify as suitable buyers for any divestment package to clear antitrust.