As time passes, investors await news as to whether Bayer A.G.'s (OTCPK:BAYRY) announced acquisition of Monsanto (NYSE:MON) for $128 a share (or $66 billion) will gain the required government regulatory approvals and close. While investor confidence increases as indicated by the company's slowly rising share price (now at about $118), opposition to the BAYRY acquisition remains strong. In the past, we have written articles about the multiple forces opposing closure of the MON transaction including: 1) Legislative and antitrust opposition; 2) national security concerns; 3) farmer and consumer/farmer groups opposition; and 4) the likely closure of the DuPont (DD)/Dow Chemical (DOW) and ChemChina ("CNC")/Syngenta (NYSE:SYT) transactions prior to the MON acquisition. Despite such opposition, many of our readers remain confident that the MON acquisition will receive regulatory approval and close. For its part, BAYRY is putting out bids for some of its businesses to satisfy antitrust regulators and close the MON acquisition. In particular, BAYRY has solicited bids for businesses that include canola, cottonseeds, the LibertyLink herbicide-resistant trait and its glufosinate weed killer. It is BAYRY's hope that by divesting such businesses, it may preempt antitrust regulatory concerns in the face of major consolidation in the agricultural seeds and pesticides industry.
While BAYRY works to satisfy antitrust regulatory concerns, a poll of American citizens shows they are almost universally against the MON acquisition. According to an early June 2017 poll, 90 percent of American voters were concerned about the BAYRY/MON merger and believed that such merger would result in harm to consumers and farmers. Such voters indicated that they wanted elected officials to take more decisive action against the growth of concentrated corporate power. Surprisingly, such voter concern crossed party affiliation lines as 91 percent of Democrats and 90 percent of Republicans expressed concern. Voters believed that the President Trump administration needed to take a more aggressive position towards preventing concentrated corporate power and monopolies. Such voters also believed that mergers, which have increased to a historic level recently, are damaging to consumers and only exist to benefit corporate profits. A majority of voters believe that large corporate mergers result in less jobs, increased prices, less consumer choice and a decline in customer service. Americans believe that the merger of BAYRY/MON will increase chemical contamination of foods they and their families eat daily. Voters also believe further that the BAYRY/MON merger would pose a significant threat to the viability of independent farmers across the country.
One would think that, with a significant number of polled Americans against the BAYRY/MON acquisition, politicians as representatives of their constituents would be more vocal in their opposition to the deal. Of course, politicians and the power of money to lobby such politicians could push through a deal despite overwhelming concerns. With that said, Americans understand what they are up against as they believe that the U.S. federal government is more interested in assisting corporations improve their returns for their shareholders than protecting the average consumer. While a majority of Americans are despondent given their belief that their political representatives bend to the will of major corporations, there are some legislators that have voiced opposition to the MON acquisition. For example, a senator introduced three bills to increase scrutiny of mergers/acquisitions and increase merger fees. Another legislator (representing farmers) 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 will review the MON acquisition). Currently, there is no clear answer as to whether any opposition efforts to increase scrutiny on the MON acquisition will succeed or not.
We believe that as other major agricultural company mergers move towards closing the odds of the BAYRY acquisition of MON closing decrease due to antitrust and/or national security reasons. Our readers may remember our skepticism that the MON acquisition will close (See our earlier articles where we discussed political/economic reasons for opposing the acquisition on antitrust grounds and where we discussed the acquisition being blocked on national security grounds). Investors, however, remain confident that such acquisition will close given the election of President Trump and a Republican Congress (who are believed to favor a less regulatory environment). So, as BAYRY and MON work to close their transaction through anticipated divestitures, farmers, organizations and politicians against the deal will continue to make additional efforts to block the deal. As noted above, BAYRY is launching asset sales of about $2.5 billion as they argue for regulatory clearance for their merger. With such potential divestitures in mind, 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 a detailed commentary on antitrust-related concerns regarding the MON acquisition, see this article).
We remain uncertain whether the relevant regulatory agencies will approve the MON acquisition. While a majority of Americans polled are against the BAYRY/MON merger, politicians and regulatory agencies hold the power to approve to such deal. One would think that the MON acquisition, given that it is one transaction in a series transactions comprising unprecedented industry consolidation to fight off weak fundamentals in the global agricultural economy, would face more vocal scrutiny and opposition. 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. With such opposition in mind, whatever the regulatory outcome of the MON acquisition, the effort to close such acquisition remains a significant effort.
The BAYRY/MON merger is the last in the series of three major mergers amongst the major agricultural companies. While the DD/DOW and CNC/SYT transactions are rapidly moving towards obtaining all of the required regulatory approvals and closing, we see the MON acquisition as standing out as unique in a way that makes the closure of such acquisition more difficult. Aside from endless environmental group attacks on MON and its business practices, the company is the premier genetically modified organism seed company in the world and is a highly valued American asset. The selling of a strategically important American asset such as MON to a German company would leave the combined DD/DOW as the only major American owned agricultural superpower. As such, one would think that the MON acquisition would attract greater scrutiny than the other transactions noted above. With respect to our objection to the MON acquisition, we believe that mega-mergers of this type tend to have short-term rewards from cost reduction synergies (We view such mergers as yielding to short-term investors not willing to wait out the cyclicality of the markets that BAYRY/MON sell into). We prefer, however, that the company remains independent, as long-term trends favor its businesses.
Over the long term, an independent MON would 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 generates increased margins. In addition, global population and wealth growth would present opportunities for the company. MON's forward price-to-earnings ratio is 24.10 based on fiscal 2017 earnings estimates of $4.89 and 21.60 based on fiscal year 2018 earnings of $5.45. Earnings estimates have been rising over the last three months for both years. We note that the median price-to-earnings ratio for MON's 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 $98.10 to $103.55 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). MON's shares currently yield about 1.85 percent. We believe that if antitrust regulators strongly consider farmer/consumer interests, they will oppose the MON acquisition. 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.
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Disclosure: I am/we are long MON, DD, DOW.
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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