Monsanto to Focus on Technology as Syngenta Merger Slips Away
February 04, 2016
February 04, 2016 by Bloomberg
Monsanto Co. wanted Syngenta AG so badly it pursued the pesticide producer for four years and made three separate takeover offers. Yet losing out to a Chinese bidder could be the best outcome for the seed company. State-owned China National Chemical Corp.’s agreement Wednesday to buy Syngenta for about $43 billion ends Monsanto Chief Executive Officer Hugh Grant’s vision of combining the Swiss company’s weed- and bug-killing chemicals with the world’s largest genetically modified seed business. Victory for ChemChina, as the state-owned company is also known, means paying 17 times Syngenta’s trailing 12-month earnings, exceeding the multiples paid in 10 comparable deals, according to data compiled by Bloomberg. Such a deal would have been too expensive for Monsanto, according to Chris Shaw, a New York-based analyst at Monness Crespi Hardt & Co.
Monsanto “is better off having not overpaid for Syngenta,” Shaw said Tuesday in a note, ahead of the official announcement of the ChemChina offer. “There’s benefit on a strategic basis as well.” That benefit, according to Shaw, lies in St. Louis-based Monsanto’s strong position in modified seeds and precision agriculture, the term for software that advises farmers on seed selection and the application of pesticides and fertilizers.
The U.S. company told investors in November it expects to add $3.5 billion in gross profit by 2019 as it rolls out new products. Big drivers of growth are expected to include Intacta soybeans, modified to combat insects in South America. The company said Wednesday a new soybean engineered to withstand the application of both Roundup and dicamba herbicides is now available in the U.S. and Canada And then there’s Monsanto’s precision-agriculture app for tablet computers and smartphones, which provides real-time data on soil conditions, weather and yields. Monsanto envisages farmers around the world paying to use the app on as many as 400 million acres by 2025. Compared with all of that, Syngenta’s crop chemicals are "mundane," Shaw said. "We have a strong stand-alone growth plan and our shareowners can be assured we will continue to remain disciplined," Monsanto said in a statement Wednesday, in response to questions about the ChemChina offer. The ChemChina deal comes less than two months after Dow Chemical Co. and DuPont Co. agreed to merge, as a prelude to splitting into three separately traded companies. One of those new businesses would include an agriculture company larger than either Monsanto and Syngenta.
If Monsanto still wants to add more pesticides, German companies Bayer AG and BASF SE may want to strike a licensing deal or even sell off some assets, John Roberts, a New York-based analyst at UBS Securities LLC, said by phone Tuesday. BASF and Bayer spokesmen declined to comment on potential deals. "Any potential opportunity would need to continue to meet three critical objectives," Monsanto said in its statement. "It must be a strong strategic fit, it must provide synergistic value and it must result in a responsible capital structure." Bayer’s agriculture business is similar to Syngenta, and the company eventually may want to exit the sector to focus on its health-care business, Roberts said. Monsanto already collaborates with BASF on developing gene-altered crops, providing a ready avenue for talks on pesticide deals, he said. But it’s possible BASF and Bayer could strike their own merger within Germany, much as Dow and DuPont are doing in the U.S., he said.
"We expect Monsanto to deepen relationships with BASF," Jonas Oxgaard, a New York-based analyst at Sanford C. Bernstein, said in a note Wednesday. Oxgaard sees Syngenta’s acquisition as "a net negative” for Monsanto. UBS’s Roberts says that even if the company remains on the sidelines, it will still benefit from the deals being done by its largest rivals, which will raise performance across the industry. "The industry being more consolidated won’t hurt Monsanto," he said. "Consolidation usually benefits everybody."