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8 May 2015 By Neil Unmack

Monsanto is heaping pressure on Syngenta. A $45 billion takeover proposal from the world’s biggest provider of seeds to farmers to the top seller of crop-protection chemicals was quickly rejected as too cheap and too risky. The Swiss target has a point on the difficulties, but needs to lay out just how it will create more standalone value.

At 449 Swiss francs ($489) a share, the cash-and-stock deal offers a decent 35 percent to the last share price. That equates to an impressive 26.5 times forward earnings, according to Starmine data, and comfortably tops analysts’ average price targets of 357 francs.

This is also a stock that has only breached 400 francs for a brief period in early 2013. Syngenta has since floundered. The shares have lost nearly 20 percent. Cheaper commodities have led farmers to cut back on pricey chemicals, while integrating its crop and seed businesses, and growing the latter, has proved costly. Syngenta’s gross margin has fallen more than 5 percentage points since 2008, UBS analysts say.

It’s also not obvious that Monsanto could afford to pay much more. The premium already equates to about 10 billion francs. Taxed and capitalised, synergies of perhaps $750 million a year might be worth roughly half that, a Breakingviews calculation suggests.

That’s not to say this would be easy. Antitrust scrutiny is inevitable, and could lead to forced sales in areas such as U.S. corn. Liberum analysts reckon U.S. regulators could panic at seeing two agricultural market leaders combined. And Monsanto is courting political controversy, because of the deal’s likely tax benefits, and because Syngenta is one of Switzerland’s most prized blue-chips.

Integration could also be painful – which could also hit Syngenta investors, who will be paid 55 percent in stock. For example, Syngenta spent four years meshing together its crop and seed units. Ripping them apart could disrupt sales and dent synergies.

Still, this looks attractive. Syngenta already plans to cut costs and raise margins by 2018, and should benefit long-term from population growth. But it needs to do more to explain how it can create more value on its own.


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