Bayer's Proposal Epitomizes a Reshaping Industry

05/23/2016 9:24 am EST


Michael Berger

President & Founder,

In the last six months, there have been three major deals in the agriculture market that have consolidated the industry and Michael Berger the Associate Editor of, discusses how Bayer’s $62 billion buyout bid for Monsanto may impact the companies as well as the other deals in place.

Werner Baumann was appointed Chief Executive Officer of Bayer AG (BAYRY) on May 1st and has already made a splash by attempting to pull off the largest corporate takeover ever by a German company.

Bayer offered $61.7 billion to buy Monsanto Co. (MON), which would make the combined company the largest seller of seeds and farm chemicals in the world. The $122 offering price not only increased Bayer investor concerns but also provided insight into the new CEO’s style and aspirations.

Acquiring a Pioneer

The potential acquisition will likely be viewed as controversial and will receive a lot of pushback as Bayer would be acquiring one of the pioneers in crop biotechnology.

St. Louis-based Monsanto was founded in 1901 and its scientists were one of the first to genetically modify a plant cell (published their results in 1983). These kind of genetically modified seeds now account for the majority of corn and soybeans grown in the US.

An Accretive Acquisition

On Thursday, Bayer saw its stock plummet more than 10%, the most in seven years, when it confirmed an offer and did not disclose the financial details. Monsanto, on the other hand, has seen its shares rally more than 7% this morning after the terms of the acquisition were disclosed.

The offer represents a more than 20% premium to Friday’s closing price. The payment would be funded with a combination of debt and equity, with about $15.5 billion coming from selling shares to existing investors.

Bayer views this acquisition as accretive and it expects Monsanto to increase core EPS by a mid-single-digit percentage in the first full year after completion and a double-digit percentage thereafter.

Role Reversals in a Reshaping Industry

The crop and seed industry has seen a lot of changes over the last year as large transactions continue to reshape the industry.

The offer must be a new feeling for Monsanto which attempted to acquire Syngenta AG (SYT), a Swiss pesticide maker, for $40+ billion in August. Syngenta ended up being acquired in February by China National Chemical Corporation for $43 billion.

Bayer's proposal could increase regulatory scrutiny as to the $130 billion proposed merger between DuPont Co. (DD) and Dow Chemical Co. (DOW) because if the Monsanto deal works out, it would be the third major consolidation in the agriculture market in the past six months.

Our Eyes Are on Bayer

BAYRY has plummeted 20% since April 21st and the shares are currently trading in oversold territory. We think this weakness is overdone as the shares trade more than 17% below its 200-day moving average and we would be buyers on any further weakness.

Although we see value at current levels, we recommend not going all-in due to the current condition of global markets. As June/July rate hikes are now on the table, we expect to see increased in volatility in the near-future.

This weakness will create a perfect opportunity to create a position in a company that has a proven track record of success and significant upside potential, while receiving a 2.8% dividend.

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