Bayer-Monsanto merger: Local players to take heat

Global fusion will drive synergistic benefits for their India-listed firms

The agri-commodity space is seeing interesting developments globally and in India, as consolidation gains pace. Germany-based Bayer AG finally succeeded in sealing an agreement to acquire US-based Monsanto Company after many months and some attempts. While Bayer AG is a global player in crop protection and pesticides, it is eyeing strong seed genetics and biotechnology business of Monsanto to drive growth and emerge as a global leader.

The two companies also have their subsidiaries in India, two of which are listed — Bayer CropScience and Monsanto India. The combined entity in India, too, will become formidable, with strong growth prospects, something the Street has already sensed. Not surprising then, the Bayer CropScience stock (which has delivered strong long-term returns) after some gains on Wednesday scaled to its all-time high of Rs 4,380 (intra-day) on Thursday. Although Monsanto India stock fell 1.7 per cent on Thursday, it had gained almost 10 per cent on Wednesday.

Bayer is already growing well in the subcontinent. Analysts at Emkay Global said they remain positive on Bayer's prospects on the back of normal monsoon, strong portfolio of innovative products, robust pipeline coming from parent's strong research and development, and steady cash flow. Analysts at Edelweiss expect strong performance. They expect sales and net profit to grow at a compound annual growth rate (CAGR) of 18 and 30 per cent over FY16-18 (versus 15 and 23.3 per cent during FY08-16), respectively.

Monsanto has seen more than 10 per cent CAGR revenue growth and net profit has doubled to Rs 101 crore over FY12-16. The firm has seen some challenges on price regulation on its genetically modified Bt cotton seeds. Thus, revenue and net profit fell 8.7 and 9.8 per cent, respectively, in the June quarter. Hence, the merger can cushion such short-term challenges. Together, they will have presence across the value chain in the Indian agri space. Notably, even as there are synergistic benefits accumulating to the two companies, competitors will feel the heat, say analysts. Combined sales of the two (Rs 4,512 crore ) and net profit (Rs 402 crore) in FY16 take it close to the largest Indian peer, UPL, that clocked revenue of Rs 13,413 crore in FY16, most of it from international markets.

Sageraj Bariya of East India Securities says the merger should trigger an open offer for Monsanto India shareholders. But, analysts are not sure if the international parent would want to operate the two India-listed companies separately. That may delay some of the gains from the merged entity.