CLSA Issues Multi-Notch Downgrade On Monsanto Amid 'Disappointing Terms' Of Bayer Deal

CLSA termed Monsanto Company (NYSE: MON)'s deal with Bayer AG (ADR) (OTC: BAYRY) as disappointing. Therefore, analysts Mark Connelly and Brock Harris downgraded Monsanto shares from Buy to Underperform. They have a price objective on the stock of $110 with a 3 percent additional upside potential.

The comments come on the heels of Bayer offering $128 a share — modestly higher than the earlier offer of $127.50 — with total transaction value of about $66 billion.

The brokerage said in a research note, "A 44 percent premium over a cyclical low in the stock is less than ten percent higher than where the stock was two years back, when the cycle was moderately stronger, suggesting that Monsanto is selling at a cyclical trough. The breakup fee, of $2 billion, is a fraction of what Monsanto itself offered Syngenta AG (ADR) (NYSE: SYT) shareowners, at a time when regulatory concerns about deal approval were far less serious."

Related Link: Bayer May Finally Be Buying Monsanto, But The Market Remains Hesitant

The analysts believe approval risk threats remain for the merger and the $2 billion termination fee is not good enough to offset the risk. Therefore, the lead analyst thinks the stock could trade at a considerable discount than the Bayer's offer price of $128 a share. As a result, CLSA thinks there is no need to boost the target price, though the offer price provides upside potentials.

The brokerage pointed out that the stock ranged between $103 and $127 during the strong years, while it traded between $83–$109 during the weak years. Therefore, Bayer's offer price represented a premium of 19 percent to the average strong and weak years' price.

At time of writing, Monsanto was down 0.73 percent at $105.98 in the first 30 minutes of Thursday's regular trading session.

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