Rejected CHF 449/share offer likely to be sweetened (with Monsanto equity)
We upgrade to Buy. From an analysis of historically achieved merger savings in the crop protection and seeds industry (peak savings in year 3 post deal of between 5-9% of combined sales ex antitrust divestments) we estimate a maximum bid premium of $19.53bn, or CHF 202/sh. Our base case share price scenario of CHF 475 would imply
that 70% of savings end with Syngenta shareholders. Monsanto could pay a strategic price above CHF 535/sh, based on our analysis. Next to financial/valuation headroom, industry logic dictates Mon's agenda we think: low crop prices, addition of chemistry to the tech toolbox, lack of white knights, a 'reboot' of the integrated offer.
EPS accretion/dilution from a Monsanto perspective yields the same conclusion
Constructing pro forma accounts for Monsanto leads us to conclude that the deal in its currently proposed (but rejected) form (ie CHF 449/share, 45% in cash) would accrete 12% to Monsanto's earnings. Assuming a raised offer via issuance of more equity, but no earnings accretion (ie another way of looking at a 'strategic M&A premium), we
compute a best case scenario offer price (from Syngenta's perspective) of CHF 540, broadly in line with the upside scenario computed via the savings route.
Antitrust manageable, white knights unlikely (timing), pressure on the top 6
We had (incorrectly) assumed that industry consolidation would start once the situation at Dow Chemical clears up. Dow and Du Pont are busy with asset deconsolidation and face activist pressure. A BASF/Syn combo would face significant antitrust in chemicals, no savings potential in Seeds and financing hurdles (BASF has never issued equity in its corporate history), although a potential end of the BASF/Mon collaboration in output traits would likely leave BASF isolated. Bayer's balance sheet is stretched (Merck OTC) but it is a potential bidder for assets that competition authorities mandate for disposals (UBSe c$3bn sales: non-selective herbicides, US corn seed, global soy, and vegetable seeds). If successful, the Mon/Syn combo will lead to mounting consolidation pressure.
Valuation: UBSe base case assumes Monsanto pays away 70% of $2bn savings
Having used a standalone DCF and multiples before, we set PT using the undisturbed share price plus NPV deal savings. Our base case of CHF475 implies that 70% of estimated savings are paid away to Syn shareholders. In our upside case of CHF535 shareholders receive 100% of deal savings (ie Monsanto paying a 'strategic' multiple).