Analyst: Bayer, Monsanto still far apart on deal

Two months after Bayer went public with its offer for Monsanto, the deal doesn't seem any closer to happening.

After the latest moves in this slow-moving courtship, the market's calculation of the odds hasn't changed much. As of Friday, Monsanto's shares traded at a 15 percent discount to Bayer's sweetened offer of $125 a share, or $64 billion.

That's after Bayer raised its price slightly and offered a breakup fee, meeting one of Monsanto's demands. Monsanto dismissed the higher bid as inadequate but didn't rule out a deal.

The market is expressing substantially more doubt than it did on May 25, the day after Monsanto rejected Bayer's initial offer. Then, Monsanto shares were only 8 percent below the $122-a-share bid.

Matt Arnold, an analyst at Edward Jones, estimates that Monsanto's board won't accept an offer for less than about $140 a share, and he doesn't think Bayer is willing to go that high.

"We don't think the odds of a deal have changed a lot," Arnold says. "We still view it as a bit of a long shot."

He gets to more than $140 a share by taking Monsanto's estimated operating earnings and multiplying them by 17. That's the fairly rich multiple that Monsanto was willing to pay for Syngenta, a Swiss agricultural company, last year.

Syngenta sold itself to ChemChina, a state-owned Chinese company, instead but the offer remains an important marker for what Monsanto believes a leading seeds-and-farm-chemicals business should be worth.

Bayer's offer falls short of that marker. Why would Monsanto sell itself for less than it valued a competitor just a year ago?

Besides, Monsanto has assets that it considers crown jewels. Its seed business holds more promise than Syngenta's. Its agricultural data unit, built around the $930 million acquisition of Climate Corp. in 2013, isn't a contributor to earnings yet but could produce a sizeable revenue stream in a few years.

"We don't feel Monsanto is going to be an eager seller unless they get a price that compensates them for all the investing they have done over many years," Arnold says.

Bayer's second bid, announced July 14, was only 2 percent above its first one. "It didn't demonstrate at all that much willingness to move higher," Arnold adds.

Even the $1.5 billion breakup fee that Bayer offered - which was meant to address concern that the deal might run into regulatory problems - isn't all that large.

Monsanto had offered Syngenta a $2 billion breakup fee. Halliburton paid $3.5 billion to oil-services rival Baker Hughes when antitrust enforces scuttled their merger - and their deal was less than half as valuable as Bayer's bid.

Monsanto will probably insist on both a higher price and a bigger breakup fee. It said as much when it responded that the offer was "financially inadequate and insufficient to ensure deal certainty."

Bayer, for its part, may not be willing to go much higher. Its shareholders would rather see Bayer invest in its pharmaceutical business. Some are already voicing complaints about the pursuit of Monsanto. Such dissent will grow louder if the deal gets significantly more expensive.

Essentially, Bayer views Monsanto as a conventional agriculture company that should be valued based on its current earnings capacity. Monsanto sees itself as a technology platform worthy of a super-premium price because of its potential to disrupt markets.

Unless one side comes around to the other's way of thinking, there isn't much middle ground to get a deal done.