Why Syngenta Is Right About the Risks of Monsanto's Merger Offer

NEW YORK (The Deal) -- Syngenta (SYT) on Monday rejected a sweetened takeover proposal from Monsanto (MON) and criticized its suitor for not taking U.S. competition concerns raised by the prospective merger of two of the world's largest seeds and crop protection companies seriously enough.

And though antitrust experts predict a merger between the two companies could get approved, the process would probably entail a time-consuming negotiation of a complicated divestiture involving multiple buyers.

Syngenta said that it would need a higher offer and higher termination fee to consider merging with Monsanto.

"If a transaction were to be announced and not consummated, there would be significant harm and value destruction for Syngenta and its shareholders, which requires a careful assessment of all risks and a clear path to closing and is in no way adequately addressed by a paltry reverse regulatory break fee relative to such fees seen in transactions with comparable levels of regulatory risk," Syngenta wrote in a letter to Monsanto, which Syngenta make public.

Syngenta has a point about the breakup fee, which represents just under 5% of the offer price. That is fine for the typical merger, but deals with significant antitrust risk generally carry reverse termination fees in the 7% to 10% range.

Since Monsanto first approached Syngenta last month the target has pointed to antitrust issues as a major impediment to considering a deal.

Syngenta is the world leader in crop protection chemicals and No. 3 in seeds. Monsanto is the world's biggest seedmaker but needs to bulk up in chemicals to remain competitive and has offered to shed Syngenta's U.S. seed business to win regulatory approval.

Monsanto is unlikely to accomplish such a spinoff quickly, if the company's last major seed deal is any guide. The U.S. Department of Justice took nine months to review Monsanto's $1.5 billion acquisition of Delta and Pine Land, then the country's largest seller of cotton seed.

The deal was announced in August 2006 and ultimately approved by the Justice Department with a string of conditions at the end of May 2007. Those conditions included the divestiture of 43 Delta and Pine Land seed lines to Syngenta.

Like the Delta and Pine Land merger, a deal with Syngenta would present both horizontal and vertical competition concerns, said Lisl Dunlop, a partner at Manatt Phelps & Phillips, who has represented agribusiness concerns including Bunge (BG).

It is unlikely that they could be addressed by divestitures to a single buyer because such a sale to one of the handful of other players in the market -- Bayer CropScience, Dow AgroSciences and DuPont (DD) -- would likely present competition concerns, too.

"This is a very close industry and there aren't that many significant players," Dunlop said.

Each of the five players made forays into various genetically modified crops and market some type of related pesticides and herbicides.

As a result, just as it did in the Delta and Pine Land deal, the Justice Department would likely insist on smaller divestitures among the major players designed to avoid new competitive overlaps. The Justice Department also could force Monsanto to offer licensing deals for some of the seed strains that it is allowed to keep.

All of these remedies would require lengthy negotiations between the parties.

This time around, Monsanto may find the pool of potential divestiture buyers has increased by one if the Justice Department now considers China National Chemical a suitable recipient.

"The DP&L review was a long one, and I think a purchase of Syngenta would be, too. There's a very broad range of products and the DOJ really focuses and has a lot of concerns about the ag industry," Dunlop said.

"This is going to get heavily scrutinized," she said.

Because of the complex array of competing and complimentary products, the Justice Department may insist that upfront buyers be identified before approving the transaction, something it doesn't always require, Dunlop said.

The wild card in the length of an antitrust review is the possibility of a sale to a financial buyer.

Monsanto may try to sell Syngenta's U.S. seed business to a private-equity firm, said John Taladay, co-chairman of the antitrust practice at Baker Botts.

By selling to a single buyer with no antitrust issues the Justice Department review could go pretty quickly.

"There are some overlaps that are pretty acute but they also are fairly discrete," Taladay said.

"If the seed business can be spun out to one buyer the deal could be done pretty cleanly," he said. "A divisible business unit that can stand on its own is a pretty attractive acquisition package."

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