What’s The Risk To Deere If Mosanto Deal Doesn’t Go Through?

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John Deere (NYSE: DE) announced the acquisition of Monsanto’s Precision Planting business in November 2015 for $190 million, but the deal came into limelight when U.S. Department of Justice opposed it in September 2016. Although, Monsanto’s precision planting revenues are small relative to Deere’s overall revenues, this deal is strategically important for Deere as the company looks to consolidate its position in the U.S. and Europe. The U.S. Department of Justice views this deal as threat to other smaller precision planting companies and U.S. farmers, who may have to pay higher prices going forward due to reduced competition. However, we think that investors shouldn’t be concerned. Even if the U.S. government’s decision goes against the deal, Deere’s opportunity cost will be limited as Deere has about 70% share in the U.S. precision farming market and the benefits from the deal going forward will be less than 3% of company’s overall EBITDA for next few years. This is assuming that Deere will generate 10-15% additional revenues from this segment due to its increased pricing power annually, than it would have done on its own.

 

Why Does Deere Seek To Buy Monsanto’s Precision Planting Business?

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Deere announced the acquisition of Monsanto’s Precision Planting business in late 2015 in order to increase its dominance in U.S. domestic precision planting market. In 2012, Monsanto had acquired Precision Planting which was founded in 1993. Its products can be used to augment new seeding equipment or to retrofit older equipment for precision applications.

Were Deere to acquire  Monsanto’s Precision Planting business, it would have exclusive near real-time data connectivity between certain John Deere farm equipment and the Monsanto’s FieldView, in order to expand Deere’s range of retrofit options into new geographies. Both Deere and Monsanto introduced high-speed planting systems in 2014 but Monsanto allowed farmers to retrofit their existing planters, giving the technology to farmers at a much lower cost. This posed a threat to Deere’s sales and amid declining commodity prices which had also affected precision planting business. Deere used this opportunity to acquire Monsanto’s Precision planting business and Monosem, the European market leader in precision planters.

 

Why U.S. Department of Justice Is Opposing This Deal?

The U.S. Department of Justice believes that this deal would eliminate competition and raise costs for farmers. Deere and Monsanto currently remain the dominant providers of the precision planting technology, accounting for at least 86% of the U.S. sales. The U.S. Department of Justice argued that allowing them to combine would end aggressive competition between the two firms that has produced better deals for the customers so far.

Deere and Monsanto have decided to contest the DoJ ruling vigorously, that the U.S. Department of Justice’s claim is misguided and that the proposed acquisition will benefit farmers by accelerating the development and delivery of new precision equipment solutions that help farmers increase yield and productivity.

 

Deere’s Opportunity Cost From Failed Deal Is Not Much

If Deere loses this legal battle, the opportunity cost would be marginal as Monsanto’s precision planting revenues amount to less than 1% of Deere’s overall revenues.

The only drawback which Deere may face in the long term is the stiff competition from other high speed precision farming companies which may hurt Deere’s pricing power in the long term. However, if Deere is successful in winning this legal battle, it will be in a commanding position in the U.S. market capable of killing any other competition with its technology expertise and capital dominance.

 

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively.

For precise figures, please refer to our complete analysis for Deere & Company.

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