Phil English Takes a Deep Dive into the Monsanto Case
One of the primary questions we try to answer in Financing the Enterprise is: What is the firm worth? We can trivially claim that the firm is worth what someone else is willing to pay us for it. This is of little comfort if we sell the firm and find out we could have realized a greater sale price for our shareholders or if we buy something and find out the hard way that we (our shareholders) paid too much. Knowing how much the firm is worth as a stand-alone entity and knowing what it is worth to the acquirer should be the beginning of any merger analysis.
Determining the value of a target is a complex process that involves forecasting (as in our Monsanto case), access to operational information that may not be public (as in our negotiation case, Flinder Valves), and a great deal of estimation for the value of the potential synergies (as in the Ben & Jerry’s case). It is worth noting that Bayer recently dangled the possibility of a higher bid if Monsanto provided Bayer with non-public operating information (Wall Street Journal 6/10/16) likely so that Bayer could estimate the value of these very synergies. After receiving some of that information, Bayer upped their offer to $125/shr.
As we learned in Financing the Enterprise, the field of finance offers us a host of ways to value a firm. These range from discounted cash flow methods such as Free Cash Flow to the Firm (FCF) to market multiples methods such as implied prices derived from the acquirer price-earnings (P/E) ratio and the target firm earnings. Monsanto, one of world’s largest producers of seeds and crop chemicals, is currently being targeted by Bayer and the merger, if successful, would create the world’s largest supplier of corn and chemicals. The current offer stands at $125/share as of 7/4/16. Monsanto (NYSE:MON) has a 52-week low of $81.22 (pre-takeover attempt) and a 52-week high of 114.26.
Valuation services such as gurufocus.com, stock-analysis-on.net, and tradespoon.com have MON DCF valuations ranging from approximately $99 to $107/shr as a standalone. At the high end of the DCF valuation, that means Bayer (ETR: BAYN) is willing to pay a meager 16.8% premium, an offer than Monsanto has already rejected. By comparison to the MON 52-week low, this is a respectable 53.9% premium.
The size of the two companies further muddies the valuation water in this case. The merger would create a company of almost unprecedented size in the agriculture industry. Agriculture has long been seen as an industry with a significant public interest and concerns about anti-competitive behavior have the EU’s antitrust agency signaling a review of the proposed merger even though it hasn’t been consummated. In an effort to relieve concern at Monsanto about a failed merger, Bayer has offered a $1.5billion reverse-breakup fee if the deal is blocked on anti-trust grounds.
For now, Monsanto isn’t budging and Bayer hasn’t come back to the negotiating table. The Wall Street Journal cites unnamed analysts as suggesting it will take an acquisition price of $130-140/shr to get MON moving. At only a 23-32% premium, it may take even more than that.