The saga of the ongoing announced Bayer AG (OTCPK:BAYRY) all-cash acquisition of Monsanto (NYSE:MON) for $66 billion (or $128 a share) continues. (See one of our earlier articles on the acquisition where we discussed our belief that the deal would likely fail due to antitrust regulators blocking the acquisition.) About a month ago we discussed the idea that investors had become more confident that BAYRY's acquisition of MON would close since the election of President Trump, and, such confidence could be seen in MON's share price, which traded at about $113 (but still well below the $128 acquisition share price). Many of our readers remain confident as well on the theory that since President Trump is a Republican and Republicans favor a less regulatory environment, BAYRY's acquisition of MON is far more likely to close since the November 2016 election. We reiterate that this simplified analysis does not fully take into account the harm a BAYRY acquisition would cause farmers and consumers. As BAYRY and MON continue their road show to sell the deal to all interested parties, additional efforts to block the deal are becoming evident that show just how contentious this deal is for a number of reasons. So, while BAYRY contemplates divestitures to convince U.S. and European regulators that the MON acquisition should close, opponents of such acquisition continue to push to have their voices heard and set up additional roadblocks to the closure of the deal.
Democrats, who mostly oppose the MON acquisition, fear that President Trump will interfere with the current U.S. regulatory review of the deal. In particular, Democrats have found it deeply disturbing that President Trump was discussing the MON acquisition during a meeting with the CEOs of BAYRY and MON earlier in 2017. A Democratic Senator, who is the top official from the party on the Senate Judiciary Committee's antitrust subcommittee, stated that the U.S. Justice Department generally reviews mergers without White House interference. Such Senator stated that President Trump, after his meeting with both CEOs, "took credit for commitments the companies made to create new jobs and invest in research and development." The Senator, however, is taking additional steps by introducing three new bills to increase scrutiny of mergers/acquisitions and increase merger fees. Many companies believe generally that, given President Trump's business-friendly appointments to key U.S. government regulatory agencies, more approvals will be given to mergers of all sizes. Investors are more confident that the MON acquisition will close, statements from BAYRY have underscored such confidence as well. Recently, BAYRY indicated that it remained confident about completing its takeover of MON by the end of 2017, despite it facing delays due to antitrust regulator concerns. BAYRY stated that it would seek approval for the MON transaction in the European Union in second quarter 2017 after regulators requested more information. The company is also responding to a second information request from the U.S. Department of Justice.
Democratic legislators, however, are not the only government officials attempting to set up additional roadblocks to the closure of the MON acquisition. There is a Republican legislator (who represents farmers) who is introducing legislation that could derail the MON acquisition. In particular, Senate Judiciary Committee Chairman C. Grassley, a Republican from Iowa (and Senate Agriculture Committee member D. Stabenow, a Democrat) introduced a bill to give the Agriculture and Health and Human Services secretaries permanent representation on the Committee on Foreign Investment in the U.S. ("CFIUS"), which decides whether deals including mergers are in the national interest. (CFIUS is a panel of government officials that assesses whether or not foreign entity initiated transactions adversely effect U.S. national security interests.) The "Food Security is National Security Act of 2017" will also set out new agriculture and food-related guidelines for CFIUS to consider when reviewing such transactions. Upon introducing the bill, the Republican Senator stated that as the global population grows it is "important to consider who will control the food supply." Ms. Stabenow added that "Protecting the integrity, safety and resiliency of America's food system is core to our national security" and that "As foreign entities continue their aggressive acquisitions of U.S. food and agriculture companies, it's imperative that these transactions face additional scrutiny." The legislation also adds new guidelines to CFIUS' review process so that proposed transactions are reviewed specifically for their potential impact on U.S. food and agricultural systems, including availability of, access to, or safety and quality of food. CFIUS is expected to review the MON acquisition.
At this point, there is no clear answer as to whether the opposition efforts to increase scrutiny on the MON acquisition will succeed or not. BAYRY and MON, are not waiting for an answer as they are launching asset sales of about $2.5 billion as they push for regulatory clearance for their merger. To initiate the auction process for the relevant assets, BAYRY is sending out information packets to prospective interested bidders for the businesses, which have been divided into three groups of assets. While the proposed assets to be divested are not known, commentators expect BAYRY to divest soybean, cotton and canola seed assets as well as LibertyLink-branded crops that are resistant to its glufosinate herbicide, an alternative to MON's Roundup Ready seeds. With these likely divestitures in mind, many investors believe regulatory agencies will approve the MON acquisition given that BAYRY's business in agriculture is primarily focused on pesticides while MON focuses on genetically modified seeds. (For an in-depth discussion of a commentator responding to most of the antitrust-related concerns regarding the MON acquisition and such commentators' belief that European and U.S. regulatory agencies will approve such acquisition see this article.) As BAYRY moves forward in its attempt to close its acquisition, we note that DuPont (DD) and Dow Chemical (DOW) await regulatory approval for their planned merger along with China National Chemical Corp.'s acquisition of Syngenta (NYSE:SYT).
Although we cannot predict whether the relevant regulatory agencies will approve the MON acquisition, we can already see that investors are overlooking delays already impeding BAYRY's progress to close the transaction. As we noted in prior articles about the MON acquisition, such acquisition is a single transaction in a series transactions comprising industry consolidation to fight off weak fundamentals in the global agricultural economy. Given that most of the major global agricultural chemical and seed companies are seeking to merge should indicate to investors that any antitrust regulatory agency doing its job should block some or all of the transactions on antitrust concerns. As agricultural industry companies attempt to consolidate, consumers and farmers have argued that a consolidation of the major agricultural companies will decrease research and development by the remaining companies and will result in increased prices for consumers. In addition, some U.S. legislators argue that food/farming technology is critical to U.S. national security. Further, farmers remain concerned that seed and chemical costs will continue to increase with such consolidation while grain prices are languishing near lows and farmers' incomes fall. So, while investors understand that Republicans favor a less regulatory environment, they should remember that many of the voters that put President Trump into office are from "farm country."
Would a President Trump allow BAYRY to acquire MON and hurt many of the voters that put him into office? Possibly. The central question then is whether a President Trump could stand up to anti regulatory Republicans to protect American farmers. This question cannot be answered definitively one way or the other. As we discussed above, there are legislators seeking to set up further roadblocks to the MON acquisition. American and European antitrust regulators and farmers are rightly concerned that the extreme consolidation of the agricultural chemical and seed businesses will increase the profits of major players in the industry, increase costs for farmers during a time of depressed commodity prices and end up having food consumers paying ever-higher prices for food products. In the current global geopolitical environment, the majority of the transactions may very well close despite the adverse effects such transactions would have. While BAYRY and MON say the combination of the companies would "boost agriculture research and innovation" to feed a global population that will be 10 billion people, farmers are very skeptical. Rather, such farmers believe that if the MON acquisition closes, they expect seed and chemical prices to increase. Farmers also believe that consolidating agricultural companies are "locking in their profits" by cornering markets by getting larger and not by creating new and innovative products. (For a detailed analysis of the adverse effects of the BAYRY/MON combination would have on farmers see this article.)
Some legislators are not backing down from their disapproval of the BAYRY acquisition of MON, now also based on national security concerns. As noted above, while most of the legislative opposition comes from Democrats there are Republicans representing farmers that oppose the deal as well. In addition to government legislator opposition, there are farmers and consumer/farmer groups that oppose the deal as well. As for our objection to this deal, we have long held that mega-mergers of this type tend to have short-term rewards from cost reduction synergies. As we have noted in a past article on the MON acquisition, we view such mergers as yielding to short-term investors unwilling to wait out the cyclicality of the markets that companies sell into, such as the agricultural markets that BAYRY and MON sell into. As MON shareholders, we prefer that the company remain independent, as long-term trends favor its businesses despite short-term adversities. Over the long term, MON will likely record above-average earnings growth due to its introduction of next-generation seeds and increased trait penetration, as each contributes to higher average selling prices and generate increased margins. In addition, global population and wealth growth will present challenges and opportunities for the company. For example, hundreds of millions of people suffer from hunger/malnutrition in some of the fastest-growing regions in the world. In addition, as global wealth increases, more people will add animal protein to their diets, increasing demand for feed crops.
MON's forward price-to-earnings ratio is 23.80 based on fiscal 2017 earnings estimates of $4.74 and 20.85 based on fiscal year 2018 earnings of $5.41. Earnings estimates have been fallen slightly over the last 3 months for fiscal year 2018. We note that the median price-to-earnings ratio for MON shares in the past has been about 20. With this in mind, we believe potential investors should wait for the share price of MON to drop to the $97.35 to 102.80 price range before establishing a full position (a forward price-to-earnings ratio in the range of 18.00 to 19.00, based on 2018 price-to-earnings estimates) to establish a position. MON shares currently yield about 1.90 percent. As noted above, we believe that if antitrust regulators strongly consider farmer/consumer interests, they would oppose BAYRY's announced acquisition of MON. We also believe that, despite near-term adversities, shareholders of an independent MON would benefit from dividend increases, share buybacks and share price appreciation given the long-term trends that favor the agricultural markets the company sells into. In other words, a failure of BAYRY to acquire MON would benefit MON shareholders over the long term. In addition, BAYRY will end up paying MON a $2 billion break-up fee if the announced acquisition fails. Although there is no clear answer as to whether the MON acquisition will close, opposition to the deal increases now based upon national security interests that say the U.S. and its agricultural interests are at play and would be better served if MON remained an independent U.S. owned company.
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Disclosure: I am/we are long MON, DOW, DD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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