ST. LOUIS — Monsanto Co. Chairman Hugh Grant said Thursday the acquisition of Emergent Genetics Inc. "raises the bar" for Monsanto and advances its shift into the seeds and traits business.
The purchase, Monsanto said, "continues the trend of greater contributions to profitability from the seeds and traits segment" and away from the crop chemicals business.
Monsanto said Thursday it is buying Emergent, a cotton-seed company based in Boulder, Colo., for $300 million in cash and loans.
Monsanto, based in St. Louis, also said its fiscal 2005 earnings estimate on ongoing business will be at the upper end of its previous estimate of $1.85 to $ 2.00 a share.
It revised its as-reported estimate to 71 cents to 93 cents, down from its previous estimate of 86 cents to $1.06, as a result of the purchase.
"Monsanto also expects accelerated ongoing EPS growth of 15% from fiscal year 2005 to 2006 and an additional 15% from fiscal year 2006 to 2007," the company said in a press release. Previously it had projected a compounded annual growth rate of 10% in fiscal 2006.
Emergent, whose brands include Stoneville and NexGen, is the third-largest cotton-seed company in the U.S., with about 12% of the market. It had sales of $ 68.9 million in fiscal 2004.
In January, Monsanto announced it was buying Seminis Inc., a producer and marketer of vegetable and fruit seeds based in Oxnard, Calif., for $1.4 billion. Monsanto said it expects to close that deal in its third quarter, which ends May 31.
At that time, Grant said Monsanto would continue to look for acquisitions that complement its seeds and traits business.
Grant, the chairman and chief executive, said with the Emergent purchase, Monsanto is "done with major acquisitions."
"We'll now set about the task of integration, execution and acceleration, and of replenishing our balance sheet," he said.
Chief Financial Officer Terrell K. Crews said Emergent and Seminis together will add "approximately $100 million of cash generation in 2006 to 2007 to our base business."
Grant added that the company's acquisitions will not interfere with Monsanto's ability to pay dividends and repurchase shares.
He said the acquisition "is expected to be accretive in its second year" and will add to free cash flow in 2006.
Like Monsanto's DeKalb brand in corn and its Asgrow brand in soybeans, Emergent "will be our retail storefront to the U.S. farmer," Grant said.
He noted that Monsanto has been able to grow market share by four points in it corn business in the last three years, and similar gains in cotton are possible.
"The decision to purchase Emergent is critical to our cotton business," he said.
"The price," he said, "is in line with what we would have expected, given the position that Emergent is expected to give us in the U.S. and India."
The company said it plans to close the Emergent deal by the end of August.
Shares of Monsanto recently were trading at $56.20, down 28 cents or 0.5%, on volume of 553,000 shares. Average daily volume is 2.8 million shares.
Monsanto evidently has decided that the time is ripe for acquisitions. Less than a month after inking a deal to acquire fruit- and vegetable-seed company Seminis, Monsanto disclosed Thursday an agreement to buy cotton-seed provider Emergent Genetics. While the Seminis deal seemed to reflect a long-term vision, Emergent Genetics is slated to be a growth engine for Monsanto's small existing position in cotton. Still, the rapid-fire nature of Monsanto's purchases may leave some folks a bit jittery.
The agricultural products giant plans to pay $300 million to seal the deal with Emergent. Through the purchase, Monsanto will take on Emergent's status as the third-largest cotton seed company in the U.S. and India. In the U.S., that will put Monsanto in a better position to challenge the leading cotton-seed companies, Bayer's Bayer CropScience unit and Delta & Pine Land.
Going forward, Monsanto expects Emergent to act as its retail face to cotton farmers. Using Emergent's brands as a showcase for Monsanto's biotechnology expertise in delivering beneficial traits to cotton seeds, Monsanto thinks it can add an additional 1% per year in the near term to Emergent's current 12% U.S. cotton-seed market share. Monsanto has used a similar model in its corn and soybean businesses to achieve impressive growth.
While the growth projections are reason to be upbeat, Monsanto is depleting its cash flow to pull off its purchases. The company upped its cash from operations for fiscal 2005 to $1.2 billion from $1.05 billion. Nevertheless, as a result of the Seminis and Emergent acquisitions, the firm expects free cash flow to come in at negative $900 million.
For the moment, though, Monsanto probably should be given the benefit of the doubt. The company's risk taking so far, namely its aggressive push into genetic traits, has paid off. Investors will no doubt keep a close eye on Monsanto to see how smoothly it integrates its new buys.
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
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