Seed and not heard

Monsanto's $46-bn Syngenta offer deserves a hearing

Monsanto needs more than fertiliser to raise its bid for Syngenta. The US agricultural chemical giant is planning a $46 billion offer after its initial approach was rebuffed by its Swiss rival, according to Reuters. Yet it is hard to see how Monsanto can justify offering more than that. Syngenta's management is under pressure to start talking.

The offer, made up of cash and shares, is roughly a 50 per cent premium to Syngenta's undisturbed share price. That premium is worth about $15.3 billion. For the deal to make sense, Monsanto needs to make at least that much in savings. There are two ways it might do so.

Part of the deal's value comes from tax savings. A blended tax rate for the combined group would be about 23 per cent. But Monsanto might get it lower by redomiciling the merged company. Assume a 21 per cent tax rate, and Monsanto's forecast earnings in 2017 would shoot up by $345 million. Valued at the same 16 times 2017 earnings multiple Monsanto traded at before its offer was announced, and that is worth $5.5 billion today.

The US seed giant might also cut some overlap, though that is limited because Monsanto will probably have to offload Syngenta's seed business to satisfy antitrust regulators. Assume what's left makes $13 billion of revenue in 2017, and that the potential cost savings are nine per cent of that, at the high end of what was achieved in similar mergers. That would give synergies of $924 million after tax, with a present value of about $9.2 billion.

With a total value just shy of $15 billion, that barely covers the premium on offer, leaving little for Monsanto's shareholders, let alone a much higher offer - unless Monsanto can get the tax rate even lower, sell Syngenta's seed business at a high price, or build pricing power without frightening trustbusters.

Syngenta shareholders might not want much more anyway. Their alternative is trusting management's plan to boost EBITDA margins to 26 per cent over time. But that seems a stretch, since the company hasn't topped 22.5 per cent in the past 15 years, according to Eikon data. Syngenta is right to be demanding, given the risk trustbusters block the deal. But this offer deserves a hearing.