Agribiz fears dog Monsanto, Pharmacia

Reuters 21dec99

Stockholm - Shares in merger partners Monsanto Co and Pharmacia & Upjohn fell further on Tuesday and are likely to be blighted for many months, to come by worries over the future of Monsanto's embattled agrochemicals unit, analysts said on Thursday.

Pharmacia shares closed 19.5 Swedish crowns lower at 381.50 in Stockholm while in New York the shares were down $2-3/8 at $44-3/4 and Monsanto was down $1-3/8 at $35-1/4 by 1650 GMT.

Analysts expect the combined group to eventually divest Monsanto's profitable but debt-burdened agricultural business, which is being sued by U.S. and French farmers worried about the safety of its genetically altered crops.

But this is unlikely to take place for at least two years, and several banks have cut their recommendation for P&U to ''hold'' from ``buy'' on the assumption that its share price will remain volatile until uncertainties over the issue are resolved.

U.S. Monsanto has managed to reap some rewards from Monday's news of the intended merger to create the world's eleventh largest drugs company as U.S. ratings agency Standard & Poor's said it might raise its debt ratings for Monsanto, while lowering those of its partner.

But the fall in the share prices has devalued the combined market capitalization of the two companies to around $48 billion from $53.21 billion prior to the deal, according to Reuters Securities 3000 data.

``The general skepticism of European consumers to genetically modified food is a problem which will haunt the company for the coming two years -- there is limited upside in the short-term,'' Carnegie analyst Peter Sellei told Reuters.

Like other Swedish analysts, who declined to be named, he has just downgraded P&U to a 'hold' from 'buy' and sees scope for further declines in the American-Swedish company's price.

Meanwhile in New York, Ryan Beck & Co and Le Anne Zhao both downgraded P&U, citing an uncertain future for agricultural products. 

Uncertainty over agrichemical outlook

``The combined company will carry the (agrichemical) problem and its pharmaceutical business will catch this infectious disease -- we don't know whether the patient will be healthy or very sick,'' Den Danske Bank analyst Carl Harald Janson said.

``The share market will look at Pharmacia and Monsanto with some skepticism during the next 12-16 months until these issues are solved,'' he added. He declined to give an outlook for the share, but said further underperformance was possible.

The new company has said it will set up its agribusiness unit as a separate entity and make a public offering of up to 19.9 percent of its shares six months after the merger, which it hopes will be completed vin the second quarter of 2000.

Most see this as a definite signal of eventual divestment, after a decision by Switzerland's Novartis AG and Swedish-UK group AstraZeneca Plc to combine and spin off their respective agricultural units early this month. If this does happen, the long-term outlook for the marriage is rosier, as its partners make complementary pharmaceuticals products and lack overlapping markets.

Handelsbanken's Stefan Wikholm is one of the few Swedish analysts who have upgraded P&U on the merger, raising his recommendation to a ``strong buy'' from a ``buy'' and increasing his share target for the company by eight percent to 540 crowns.

``I am looking at the group as a pharmaceutical company which will get a clearly stronger business...,'' he said.

The merged company will brandish an impressive arsenal of drugs, including Monsanto's top-selling arthritis drug Celebrex and treatments for glaucoma, colorectal cancer and insomnia.

But P&U's expected double-digit growth in drugs sales is unlikely to be matched by earnings on the agricultural business side, despite the fact that Monsanto's business is the most profitable in that sector.