Publication Date: December 21, 2016
This 62-page risk arbitrage research report focuses almost exclusively on the international (ex-US) antitrust aspects of the deal, less covered, yet potentially deal-breaking risks. The analysis considers the deal’s effects on competition in China and Latin America, and pays particular attention to scrutiny from the European Competition Commission (EC). The findings suggest that there is potential for the EC to block the deal, stemming from issues with: 1) BASF, which could be unwilling to help and/or may instead purchase divested assets from Dow/DuPont, and, 2) the EC, potentially defining the “bundling” of seeds and crop protection products as a distinct product market, which could lead to monopolistic dominance and foreclose competitors on conglomerate grounds. Until we receive more clarity on the Dow/DuPont EC decision and corresponding divestiture buyers, we would not be long Monsanto.
1. Agriculture Sector Overview and Pushes for Consolidation 2. International Antitrust Reviews: Europe, China and Latin America 3. Key Horizontal Issues 4. Key Vertical and Conglomerate Issues 5. Precedents and Factors Indicating Monsanto / Bayer Will Succeed 5.1 Divesting Bayer Seeds and Monsanto Crop Protection Can Solve Horizontal Concerns 5.2 The Divestiture Cap Can Most Likely Be Exceeded 5.3 Bundling Already Exists, So the Competitive Landscape is Unchanged 5.4 Not Sufficient Evidence that MON/BAYN Has Incentive to Foreclose Rivals 5.5 Farmers Benefit from Innovation and Efficiencies, Outweighing Removal of Competition 5.6 Interdependence: If Dow / DuPont Clears, So Should Monsanto / Bayer 5.7 There is a High Hurdle for Conglomerate Mergers to be Deemed Anti-competitive 6. Precedents and Factors Indicating Monsanto / Bayer Will Fail 6.1 Waiting for Dow/DuPont and Syngenta/ChemChina Rulings 6.2 Too Much Dependence on BASF Given Current Market Consolidation 6.3 The EC May Consider Bundled Offerings to be a Distinct Market 6.4 Potential Duopoly of Bundling Ag Companies with the Ability to Foreclose 6.5 The EC Has Blocked Conglomerate Mergers in the Past 6.6 The Efficiency and Innovation Benefits Argument Often Fails 6.7 Political Influence is Less with Trump, and Lobbying in Europe May Prove Ineffective 7. Antitrust Parallels with Dow / DuPont and Syngenta / ChemChina 8. Potential Results of the Antitrust Reviews 9. Bayer, Monsanto and Strategic Rationale to Merge 10. Break Prices, Probability of Completion, Risk Arbitrage Considerations 11. Deal Structure, Timing Expectations and Risk Arbitrage Thoughts
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