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.
