On a stand-alone basis, we continue to value Monsanto at $120 per share. The offer price is about what we had expected from Bayer, given Monsanto's recent trading range and the takeover enterprise value/EBITDA multiple that Syngenta received from ChemChina (see our May 12 note). Bayer would finance the deal with roughly 75% debt and 25% equity.
We think this is a pretty good deal for Monsanto's shareholders, but we still expect Monsanto's board will reject the initial offer to at least try for a higher price. We think Monsanto's management sees itself as an acquirer in this current phase of consolidation, not a target.
That said, we had expected a rejection of the offer sooner (the offer was received May 10), and the fact that the board hasn' t responded yet
makes us think it is seriously considering this deal. Although we think Monsanto's shares will appreciate toward Bayer's offer over the long run, a buyout at our fair value estimate would represent an immediate and certain outcome (assuming the deal closes) for shareholders. We see no reason to modify our fair value estimate since the offer price and our stand-alone value are so closely aligned. Our wide moat rating is also intact.
Bayer's management is confident it can obtain regulatory approval for the deal. Because of a lack of substantial product overlap, we agree that Bayer should be able to close the deal with minimal divestitures. Monsanto's ag business is tilted toward seeds, while Bayer's is tilted toward crop chemicals. We think Bayer's seed businesses may need to be sold as part of a deal, but we don't think regulators would get too hung up on the overlap in herbicides, where Monsanto's only position is in commodified glyphosate.
Even if a deal doesn't happen, we see long-term value in Monsanto's shares. Past fiscal 2016, we think Monsanto's growth is set to reaccelerate, as we see this year as only a hiccup for a wide-moat company and clear leader in crop biotechnology. Our long-term outlook assumes crop prices, relevant currencies, and glyphosate pricing will stabilize near current levels, with incremental growth for Monsanto driven not by improvement in these outside (and uncontrollable) factors, but rather by the continued monetization of the company's innovative product lineup and pipeline.
Monsanto should see growth from multiple products, including the continued rollout of its Intacta soybeans in South America, the commercialization of Roundup Ready 2 Xtend soybeans, and incremental price lifts for its best-in-class corn hybrids. Longer term, we expect contributions from the digital agriculture platform Climate and Monsanto's microbials partnership with Novozymes. We think the market has focused too much on near-term headwinds at the expense of Monsanto's solid long-term outlook.
