Bayer (BAYRY, Financial) has offered to buy Monsanto (MON, Financial) for $128 a share, yet the market value of Monsanto is only $102.48. Evidently, the market does not think this deal is going to go through. Neither do I.
Before we get into industry news, let’s take a look at the financials of the two companies. Monsanto has a market cap of $44.83 billion and a dividend yield of 2.04%. The balance sheet shows $1.2 billion in cash and $3.9 billion in accounts receivables. The liability side shows $2.97 billion in accounts payables, $2.6 billion in loans and $7.9 billion in long-term debt. The balance sheet is pretty solid. Sales did drop from $15.855 billion in 2014 to $15 billion in 2015 with weak grain prices. Free cash flow was $2.1 billion. In a lot of ways, Monsanto is a classic value stock—strong balance sheet and plenty of free cash flow.
Bayer has a market cap of 76.7 billion euros ($85.7 billion) and a dividend yield of 2.73%. The balance sheet shows 2 billion euros in cash and 11.8 billion euros in accounts receivables. This is to 5 billion euros in accounts payables and unbelievably, no long term debt. There are other liabilities like pensions and leases. Free cash flow was 4.3 billion euros last year. Sales grew from 42.2 billion euros in 2014 to 46.3 billion euros in 2015.
According to a press release by Bayer, the deal would be funded by $19 billion in convertible bonds and $57 billion in bridge financing by several large investment banks. Also in the press release, “Bayer has committed to a USD 2 billion reverse antitrust break fee, reaffirming its confidence that it will obtain the necessary regulatory approvals.” If this were a Mario Puzo movie, I could see Monsanto working in the background to foil the merger and pocket the $2 billion.
Straight from a press release by American Farm Bureau, "This deal between Monsanto and Bayer comes close on the heels of the proposed Dow-DuPont merger. The Farm Bureau believes the Department of Justice should undertake a close review of the overall business climate that has encouraged these combinations, rather than evaluating them in isolation. Consumers must continue to have fair access to the best technologies and innovation." In other words, the farming community is concerned.
As I write this article, I am watching the hearing live. Like many hearings, the senators ask questions that are pertinent to their home states. Currently, a senator is talking about Canola oil. What I did find interesting and that I have not seen on the internet is Sen. Patrick Lahey’s written statement. He noted how consolidation killed the small dairy farmer in Vermont and that there would be too much power in the hands of a few players if these mergers go through. Chuck Grassley is the lead Republican on the panel. Monsanto has given Grassley $20,500 in campaign contributions over the last few years.
Dr. Robert Fraley, chief technology officer of Monsanto, lays out a pretty strong argument for the merger. He pointed out that the company spend $300 million on R&D 15 years ago and now spends $1.5 billion. He pointed out that Apple (AAPL, Financial), Microsoft (MSFT, Financial), Pfizer (PFE, Financial) and Merck (MRK, Financial) each spends $10 billion a year. He makes a good point. Monsanto will probably have to bump up R&D to compete.
As I listen to the hearing, Sen. Cruz introduced into the record a study by Texas A&M that the mergers of Dow (DOW, Financial), Dupont (DD, Financial), Monsanto and Bayer would raise prices on corn, soybeans and cotton by 20%. Another senator is questioning whether the merger would be done for R&D or tax purposes. He noted that corporate taxes would be reduced. The senator noted that Monsanto’s tax rate is 28% and would be lowered by 800 basis points, or $2 billion.
In my opinion, the merger will not go through. Farmers do not want it, it would be another American company moving offshore, and Monsanto would receive a $2 billion break-up fee. Democrats do not want it and Republicans do not want it. Looks dead in the water.
Disclosure: We own Monsanto debt.
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