We initiated a position in Monsanto (NYSE: MON) in March of this year when the shares traded below $85. Our intrinsic value was $120, giving us an adequate margin of safety (price-to-value of .70x). Later in the spring, German pharma and ag company, Bayer, made an unsolicited offer of $122/share. Bayer upped the offer slightly over the last few months and finally yesterday, MON and Bayer came to an agreement at $128/share.
We added to our position yesterday with the shares trading around $107, offering nearly 20% upside to the $128/share offer. Here's our logic in adding to the position: We still think MON is worth $120/share, absent a deal. Bayer offered to pay a $2 billion ($4.60/share) breakup fee if the deal doesn't pass antitrust. The deal is expected to close at the end of 2017, so we expect another $2.70/share in dividends over the next five quarters. We think the downside value is $89, the price of MON shares before the Bayer offer.
Downside: $89 + 4.60 + $2.70 = $96.30 (-$10/share) | Upside $128 + $2.70 = $130.70 ($24.70/share) = 2.47x upside/downside ratio.
We like MON and would be happy to own and add to the shares if the deal doesn't go through and the market price drops below our downside price.