Goldman Reviews Bayer-Monsanto Deal

Goldman Sachs maintains its Buy rating on Bayer AG (ADR) BAYRY following its $66 billion takeover of Monsanto Company MON and said investors have now become more positive about the strategic fit and the resultant new entity.

Bayer has agreed to buy Monsanto for $128 per share, representing a 44 percent premium to Monsanto's unaffected share price of $89, and an enterprise value of $66 billion. The companies have also agreed a $2 billion break fee.

"The merger creates the global #1 agricultural player and leader in seeds and crop protection. Pro forma (2015), the new Bayer entity would have 38 percent of sales from Crop Science, 28 percent from Pharmaceuticals and 11 percent from Consumer Health," analyst Keyur Parekh wrote in a note.

Related Link: Bayer To Buy Monsanto (Finally) For $66 Billion

Bayer expects the deal to be accretive in the first year, reaching double-digit accretion by the third. Bayer previously guided to mid-single-digit EPS accretion in the first year and double-digit accretion in the second year. Bayer expects the deal to close by year-end 2017.

"On our analysis, assuming a 3.5–4.0 percent USD-based financing cost, the deal would be -1 percent to 1 percent accretive in the first year after close and 3 percent to 5 percent accretive in the second (ignoring any discount on the rights issue financing component)," Parekh continued.

Parekh, who has a Buy rating on Bayer shares, attributed the slightly lowered accretion guidance to the current plan of Bayer to raise $19 billion of equity via converts and a rights issue, while previously expecting to finance the deal with 25 percent equity ($17 billion).

However, the expected synergies remain at $1.5 billion after year three, with no split provided between cost and revenue synergies.

At the time of writing, ADRs of Bayer rose 1.04 percent to $105.33. Monsanto was up 0.67 percent at $106.81.

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