Will Monsanto Consider Bayer's Sweetened Bid Or Buy BASF?

Leading agricultural chemicals firm Monsanto Company (NYSE:MON) recently received a non-binding, revised acquisition proposal from German drug and chemical organization, Bayer AG (DE:BAYGN). Per the modified proposal, Bayer has made a new all-cash offer of $125 per share. Notably, the proposal includes a $1.5 billion breakup fee that would be paid in case it falls through due to government regulations.

In May 2016, Monsanto had turned down Bayer’s $122 per share takeover bid on grounds of being “insultingly low.” In response to the refusal, Bayer has sweetened its pot by raising the bid to $125 per share, at a premium of 40.4% over the closing share price of Monsanto on May 9. The amended proposal will now be evaluated by Monsanto’s board in consultation with legal and financial advisors.

Bayer’s raised cash offer would serve Monsanto’s shareholders’ interests better. However, Monsanto might turn down the proposal yet again if it remains inclined to acquire premium agro-chemicals company, BASF SE (OTC:BASFY) .

Monsanto is focused on reinforcing its crop chemicals portfolio in order to complement its seeds business. In sync with this plan, the company has attempted to purchase the renowned agro-chemical firm, Syngenta AG (NYSE:SYT) , at least thrice over the years. Though the move was not successful, Monsanto is on track with its agenda and is currently in talks to buy BASF.

Strategic acquisition of BASF would boost Monsanto’s herbicide and fungicide offerings and hence, make its business more competent in the highly competitive agro-chemical industry. BASF is a premium producer of weed killer dicamba herbicide. Monsanto’s Roundup herbicides are becoming resistant to the weeds. Therefore, the inclusion of dicamba within its product portfolio would likely be beneficial to the U.S. seed company.

Zacks Rank

Monsanto currently carries a Zacks Rank #5 (Strong Sell), which implies that the stock has high chances of underperforming the broader market in the quarters ahead. The company remains exposed to several macroeconomic headwinds. Negatives like economic slowdown in major emerging nations like China, cyclical downturn of agricultural industry, low prices of agro products, strengthening U.S. dollar and devaluating Argentinean Peso are the major risks faced by the company. In fact, issues like these resulted in Monsanto’s weak third-quarter fiscal 2016 results.

We note that the agro-chemical industry is currently consolidating to grapple with the several headwinds it remains exposed to. The industry is currently dominated by six mega companies. Notably, E. I. du Pont de Nemours and Company (NYSE:DD) and Dow Chemical (NYSE:DOW) agreed upon a $130 million merger deal in 2015. In Feb 2016, Syngenta agreed to be bought by ChemChina for $43 billion.

What’s in Store?

Monsanto is yet to reveal its cards. Its conversations with BASF might actually be a strategic move to keep the doors open for a higher price offer from Bayer. On the other hand, the company might simply reject Bayer’s offer and take the riskier route of achieving its long-term goals with BASF. Shares of Monsanto stood at $104.2 as on July 14, 2016, up 2.9% from Jul 1 when the revised proposal of Bayer was first verbally announced.

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