Monsanto-Bayer Deal Raises Regulator Scrutiny for Ag Tie-Ups

With  Monsanto finally accepting  Bayer's (BAYRY) purchase offer, antitrust regulators have a full plate of seed and crop chemical tie-ups to review. With several potential deals being considered together, we think the probability that each of the deals will be approved has decreased compared with a scenario where each deal faces the regulatory bodies on its own.

Still, we think it's more likely than not that all of the deals currently on the table--Bayer's purchase of Monsanto, the merger between  Dow Chemical (DOW) and  DuPont , and ChemChina's purchase of  Syngenta --will eventually receive regulatory approval. This view is based on the general lack of product overlap between the companies involved and our belief that selling seeds and crop chemicals together is not a path to increasing competitive advantage. We also think there will be more than enough competition among the remaining players to foster future industry innovations. We expect relatively minor divestitures will appease regulators in areas where product portfolios are sufficiently similar.

With all of the deals now in front of regulators, we have adjusted our probabilities of each deal closing and subsequently amended our fair value estimates for many of the major seed and crop chemical players. We've raised our Monsanto fair value estimate to $126 per share from $120 to reflect the acceptance of Bayer's $128 per share offer but still account for the chance that the deal fails to clear regulatory hurdles. We've trimmed our fair value estimates for Dow Chemical, DuPont, and Syngenta, as we believe adding Bayer-Monsanto to the regulatory mix somewhat decreases the probability that the other deals will pass. Our Dow Chemical fair value estimate has dropped to $50 per share from $53, and our DuPont fair value estimate has fallen to $65 per share from $69. We've decreased our Syngenta fair value estimate to $90 per ADR (CHF 438 per share) from $92 (CHF 445).

We think there's a 75% chance the Monsanto-Bayer deal closes. Our $126 fair value estimate is a blend of our stand-alone fair value of $120 per share and the $128 offer price from Bayer. We see regulatory concerns as a fairly low hurdle because of the lack of broad overlap between the portfolios of Monsanto and Bayer. Monsanto's ag business is tilted toward seeds, and Bayer's is tilted toward crop chemicals.

We do think Bayer's seed business, which includes soybeans, cotton, and vegetables, will be sold as part of a deal. But we don't think regulators would get too hung up on the overlap in herbicides, where Monsanto's only position is in commoditized glyphosate, which has suffered recently from oversupply out of China.

We place a 65% probability on the Dow-DuPont merger closing. We see more product overlap between Dow and DuPont and think regulators are more likely to have bigger issues with this deal. Even so, we think divestitures will eventually solve this issue. Dow's agriculture business sales are weighted about 80% to crop chemicals and about 20% to seeds and traits. We expect seeds and traits growth to accelerate with the continued commercialization of the Enlist weed control system. On the other hand, DuPont is about 70% seeds and 30% crop chemicals. We think part or all of Dow's seed business may face divestment and some of the herbicide and insecticide portfolios may need to be sold as well.

We use a 75% deal closing probability for ChemChina-Syngenta. With the Committee on Foreign Investment in the United States greenlighting the deal, a major hurdle has already been passed, but we think regulators may have some questions about what could happen to generic crop chemical competition by merging a big specialty player with the world's largest generic producer. ChemChina owns Adama, an Israeli manufacturer of generic crop chemicals, and the world's largest maker of nonpatented crop chemicals. Syngenta focuses for the most part on the specialty crop chemical market.