Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

Bayer-Monsanto merger: Limited good if curbs stay

There is no clarity yet on what part of Monsanto's business will be aligned to Bayer Cropscience and by what time

Monsanto India Ltd investors seem very excited about the ownership change. They drove up the stock 35% from Bayer AG’s first acquisition proposal to Monsanto India’s parent. Shares of Bayer Cropscience Ltd, the acquirer’s subsidiary in India are, on the other hand, much more muted—they are up just 5% in a volatile trade. Why the trepidation?

First, it is not clear how Bayer AG, the acquirer, will go about Monsanto’s India business. Monsanto operates through three units in India. One is Monsanto India, the listed entity that sells maize seeds and a herbicide product. The second is Monsanto Holdings Pvt. Ltd, which distributes Bt cotton and hybrid vegetable seeds. The third is Mahyco Monsanto Biotech (India) Pvt. Ltd, a joint venture that sub-licences genetically modified (GM) cotton traits to seed companies.

There is no clarity yet on what part of Monsanto’s business will be aligned to Bayer Cropscience and by what time. Or if the two listed firms will be merged at all.

Also, even if Bayer amalgamates the businesses, apart from portfolio expansion and distribution leverage benefits, it has limited chance of deriving a sustainable revenue growth driver immediately.

All three Monsanto units right now lack growth drivers. The cotton seeds business is facing prospects of price curbs. The existing GM technology is said to be losing efficacy. To keep up the sales tempo, Monsanto tried to introduce new trait seeds (Ready Flex). But it withdrew the application, objecting to the government proposal to share technology with local firms. The withdrawal is not only a setback for the cotton seeds business, but also for the listed company. The new seed trait is tolerant to Monsanto India’s agrochemical product and would have been sales accretive.

Of course, the listed company has a strong presence in corn seeds and is expected to do well this year, which partly explains the share price surge. But its business is turning more cyclical—it is tied to maize crop acreages and lacks long-term growth triggers. The company’s average annual revenues grew by an unexciting 7% in the last three fiscal years compared to Bayer Cropscience’s 11% growth.

Opening of the Indian market to non-cotton GM seeds will be a breakthrough for the listed company and Monsanto Holdings as well, as they have access to these technologies. But approvals have been pending for long. “At best, Monsanto India Ltd can see stable to moderate growth. It lacks any big triggers, which can kick in only when it introduces any new seed traits (non-cotton GM technology). But for that, it has to overcome regulatory hurdles," says Vijayaraghavan G., senior vice-president (research) at IDFC Securities Ltd.

According to an analyst with another broking firm, the ownership change can bring a fresh approach to regulatory problems, which can help revive Monsanto’s India business. Even bereft of regulatory cooperation, Monsanto is expected to benefit from Bayer’s distribution and marketing. “As a combined entity, Monsanto’s India businesses should be able to benefit from the distribution reach of Bayer," adds Vijayaraghavan.

Perhaps the perceived benefits are driving the Monsanto stock, be it the prospect of an open offer or leveraging Bayer’s marketing reach. For Bayer, the gains can be gradual. The stock may not get an open offer. But the company stands a chance to gain an unparalleled economic advantage in the Indian agriculture inputs market if it wriggles out of the regulatory problems, revives the cotton seeds business and introduces Monsanto’s proprietary products in the domestic market.