Why the Monsanto-Bayer Takeover Probably Won’t Happen

A Monsanto-Bayer takeover is supposedly in the works. According to activity in the options market, however, the deal will likely never happen.

I received a question yesterday from a reader regarding the Monsanto-Bayer takeover drama. For those not familiar, Bayer, the German chemical giant, approached Monsanto (MON) with a $122 per share bid for the company in the spring. Monsanto rejected that price, and then rejected a $125 per share bid several months later.

Yesterday, it was reported that the two companies were in “advanced negotiations” and that Bayer was willing to pay up to $127.50 per share. According to reports, Monsanto told Bayer that it is “close” to a deal.

The reader asked if I had spotted aggressive call buying in MON, and if so, was there a way to take advantage of the situation. Here’s what I found.

There was aggressive call buying in MON call options yesterday, including a buyer of 5,000 October 115 Calls for $1.51. However, as I told the reader, the stock and options trading markets are telling me the deal may not happen.

First off, with a deal in “advanced negotiation” and “close,” one would expect Monsanto’s stock to trade within range of the expected price of 127.50. But that’s not the case; MON is trading at 106--$21.50 below the reported takeover price.

Let’s compare this alleged Monsanto-Bayer takeover with another deal, the White Wave (WWAV)-Danone takeover, which was agreed to at 56.25. Because traders believe that this deal will close, WWAV is trading just $0.50 below the takeover price. However, as mentioned above, MON is trading $21.50 below the reported price. This leads me to believe that even if the companies agree on a deal, there will be major regulatory hurdles and the deal may never happen.

The options market also doubts the Monsanto-Bayer takeover will happen. We can see this by looking at any number of strikes expiring in the next three to six months.

For example, the MON January 115 Calls could be bought today for $2.75. If the deal were to close at 127.50, those calls would be worth $9.75. Looking farther out in time, the MON April 115 Calls can be bought today for $4. If the deal were to close at 127.50, those calls would be worth $8.5.

Because the stock and options markets are sending signals that this deal is unlikely to happen, I will not put on a position in MON. However, if you want to take a “cheap shot,” the April 115 Calls listed above might be the way to position yourself.

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.