Does DuPont’s GM Technology Deal With Monsanto Make Sense?

DuPont, (NYSE:DD) the chemical giant that owns the world’s second largest seed company Pioneer, has struck a deal with the world’s largest seed company and its biggest competitor, Monsanto, settling the ongoing litigations between the two companies outside the court. According to the deal, DuPont is expected to give at least $1.75 billion in royalties to Monsanto over the period of next 10 years in return for access to two of its genetically modified (GM) seed technologies, RoundupReady 2 Yield and Xtend and regulatory data rights for the soybean and corn traits previously licensed from Monsanto, enabling it to create stacked trait combinations. The deal also scraps the $1 billion penalty, the U.S. federal court in St. Louis had imposed on DuPont as it found the company misusing Monsanto’s RoundupReady technology as well as DuPont’s anti-trust litigation against Monsanto. (See more on this:The Success Of New Seed Varieties Is Critical For DuPont). Here, we take a look at the potential impact of this deal on DuPont’s seed business and its stock price. ^[1]

What does the deal mean for DuPont

The advent of GM seeds has changed the agricultural landscape completely by providing farmers with higher yields, lower susceptibility to weeds and insects and increased tolerance to extreme climatic conditions, such as drought. We believe that this trend will only flourish even more going forward due to the advancements in biotechnology as the economic benefits clearly outweigh suspected disadvantages of the use of GM seeds. In such an environment, DuPont could not afford to go against the leader in GM seed technologies, Monsanto. Monsanto’s RoundupReady introduced in 1996 now covers more than 80% of soybean produced globally and more than 90% of the of the crop produced in the U.S. As apparent from these statistics, it has been hugely successful and DuPont has also gained because of the license to this technology and its broad customer base. In 2012, DuPont controlled more than 36% of the U.S. soybean market and it realizes the need to access Monsanto’s latest technology in the field to sustain its leadership in the market. Monsanto, on the other hand will benefit from assured access to DuPont’s broad customer base and a minimum amount of future licensing revenues. ^[2]

There are two broad benefits to DuPont’s Pioneer seed business out of this deal. Firstly, it reduces the risks associated with the company’s future revenues from its seed business as it would now have access to the latest technologies in this evolving industry. Secondly, DuPont can sustain and increase its existing market share in the industry as the concentration in GM seeds industry is expected to increase further due to this deal.

With access to the latest technology in the industry and its own experience in advanced breeding technologies, DuPont is betting on reduced growth opportunities for smaller players in the field to increase its market share. However, it will be interesting to see if these benefits can translate into positive incremental cash flows to the company going forward. Here, is a short analysis to provide a clearer picture of the potential tangible benefits of the deal to DuPont.

We currently forecast DuPont’s share in the global corn, soybean and other seeds market to increase from around 19% in 2012 to over 21% in the long run. However, if we adjust the forecast to increase the company’s market share to around 25% in the long run using our interactive chart, it results in additional $2.50 to our estimate of the company’s stock price.

Now, according to the deal, DuPont is expected to pay annual royalties totaling $802 million to Monsanto over the four years period ending 2017. Over the next 6 years ending 2023, the company is expected to pay a minimum of $950 million to Monsanto. If we spread these payments across the time line evenly assuming a hypothetical scenario, it would come out to around $1.2 billion today or $1.30 per share, assuming a discount rate of 8%. Under this scenario, the net impact of this deal translates to an upside of just under 5% to our price estimate of DuPont’s stock.

While the actual impact of this deal on DuPont’s business will unfold with time, ultimately, you need to believe the company will be able to create at least $1.30 per share in value as a result of increased access to the GM technology of its biggest competitor and the leading player in the field; otherwise, you should not be get excited about the deal.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. DuPont and Monsanto Reach Technology Licensing Agreements on Next-Generation Soybean Technologies, www.pioneer.com [↩]
2. DuPont sends in Former Cops to Enforce Seed Patents, November 2012, www.bloomberg.com [↩]