The Prospect Of The U.S. Blocking The Bayer-Monsanto Deal Can't Be Dismissed

Susquehanna analyst Don Carson downgraded Monsanto Company MON from Positive to Neutral, while raising its price target from $125 to $128.

The downgrade is not a result of increasing headwinds or poor performance, but rather because the 9-percent upside from Bayer AG (ADR) BAYRY's $128 per share acquisition is below Susquehanna’s 15-percent minimum for a Positive rating.

Why Downgrade If Acquisition Is All But Certain?

Carson is confident that the Bayer acquisition will close, albeit with some revisions at the suggestion of antitrust authorities in the U.S. and South Africa, but notes that the risk of a block cannot be dismissed.

Carson’s concerns stem from political considerations more so than economic ones.

The consensus expectation that the deal will close is based largely on ChemChina’s acquisition of Syngenta AG (ADR) SYT and the Dow Chemical Co DOW–E I Du Pont De Nemours And Co DD merger, but neither resulted in a foreign entity taking ownership of a globally-leading U.S. company.

Trumptastrophy In The Making?

Bayer has said it would keep Monsanto’s headquarters in St. Louis as well as add 3,000 jobs, but Germany has been critical of the Trump administration — a matter that could boost protectionist sentiments.

Failure of the deal to go through could mean a downside of $18 from the price target to $110. Other non-acquisition headwinds could push the share price down further to around $100.

Monsanto will report its third-quarter fiscal 2017 earnings on Wednesday. Carson noted that Q3 is typically the company’s second strongest each year. He also expects management to raise the low end of its EPS guidance, currently at $4.50–4.90 compared to his estimated $4.85.

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