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Monsanto, Syngenta merger: a catalyst for further consolidation?

After Syngenta rejected Monsanto’s $44.5bn takeover offer last month, Monsanto has said it will keep pursuing the deal.

Seed giant Monsanto’s efforts at acquiring seed and agri-chemicals company Syngenta has run into many hurdles, but the St Louis-headquartered business is not giving up.

Since Syngenta rejected Monsanto’s $44.5 billion offer on 8 May, Monsanto has reaffirmed its commitment to the merger and has announced it would divest all Syngenta’s seeds business and other overlapping chemistry assets should a merger take place.

This commitment will “make Monsanto better positioned than anyone in the industry to create a new company committed to integrated, value-added solutions and enabling continued choice in the seed industry,” the firm said in a statement. “Further, the proceeds from the planned divestitures would create a source of cash to allow the combined company to have a responsible capital structure post-close.”

Monsanto made this pledge in an effort to win regulatory approval for a takeover of its Swiss rival because Syngenta has previously expressed concerns that the overlapping business sectors between the two companies could be a regulatory hurdle due to monopolies rules.

Should the deal go through, the combined company would have an unprecedented market share in soybeans and corn seeds. And the agricultural-chemical industry might face pressure to further consolidate, according to commentators. “A Monsanto/Syngenta deal would mark the beginning of further deals,” said Martin Lehmann, manager of 3v Asset Management’s 3v Invest Swiss Small & Mid Cap Fund, quoted Bloomberg News earlier this month.

“A pairing of Monsanto and Syngenta would create a market leader in seeds, crop protection chemicals, agrichemical distribution, and biological,” Laurence Alexander, an equity analyst from Jefferies, who covers Monsanto, said in an industry note earlier this month. “A low interest rate environment, a troughing ag cycle, and increasing acknowledgement that biotech traits are not ‘silver bullets’ make a deal strategically logical.” Alexander said the deal makes even more sense if Monsanto aims to thwart a potential Chinese competitor longer-term.

The initial offer of 449 Swiss francs a share ($486.20 at the time) would have valued Syngenta at around $45 billion, which the Swiss firm said “fundamentally undervalues Syngenta’s prospects and underestimates the significant execution risks, including regulatory and public scrutiny at multiple levels in many countries”.

Emerging markets accounting for over 50 percent of Syngenta’s sales. “Our integrated strategy has been particularly successful in these markets, which in 2014 registered double-digit growth rates for the fifth consecutive year, and which represents a major part of the future growth potential for our industry,” Michel Demaré, chairman of Syngenta, said in a statement. He said Syngenta has a strong pipeline of innovative crop protection products in development, which have total peak sales potential of over $3 billion.

Monsanto did not make any additional comments on this matter but said in a 8 May statement that it is willing to work with Syngenta and push the deal forward. “The combination is expected to result in substantial synergies as the company delivers more integrated solutions to customers,” Monsanto said in a statement.

Founded in 1901, Monsanto produces seeds for fruits, vegetables and key crops such as corn, soybeans, and cotton. It serves about one third of the global seed market, much of which overlaps with Syngenta’s seed business.

“The two companies would probably have synergies in biologicals and agronomy,” Alexander and his peers Jeffrey Schnell and Daniel Rizzo said in the May report regarding the deal. “Combining efforts would significantly de-risk Monsanto’s initiative, while giving it economies of scale.”

“The newsflow, however sketchy, has basically insulated Syngenta from exogenous shocks this summer, in our view,” Alexander said in a recent company note on Monsanto. “With so much debate on deal logic, we expect both companies to face net multiple compression if a transaction does not occur.”