Will Consolidation Reshuffle Agriculture Markets?

Jeffrey Stafford: The recent bumper crop of seed and crop chemical deals is poised to reshuffle the industry. Yet in contrast to emerging consensus, we doubt the integrated seed-chemical model is likely to generate meaningful synergies or strengthen competitive advantages. Still, we don't view the deals as value-destructive, as takeover offers were made amid fairly depressed share prices. And we doubt antitrust regulators will stand in the way of the consolidation trend, since product overlap between the various merger partners is fairly limited.

Shares of Bayer and Monsanto both look compelling. We see 35% upside for Bayer and 15% upside for Monsanto, assuming a deal between the two companies cannot be reached, which is our base case scenario. We don't think Monsanto and Bayer will be able to negotiate a deal price that is acceptable for both parties.

And even if Bayer ends up slightly overpaying for Monsanto, its valuation would remain attractive. We estimate Bayer would need to pay nearly $200 per share to drive our fair value estimate for the company to its current share price. A deal near $200 just isn't going to happen. Bayer can't afford it, and Monsanto would accept a much lower price.