The first anniversary of Bayer’s September 14, 2016 announcement that it had agreed to acquire Monsanto for $128 per share in an all-cash transaction is approaching. For the past two months, Monsanto has been trading at an average 8.4% discount to that offer, according to an article by John Abbink on SeekingAlpha.com.
This is a considerable narrowing from the levels at which it was discounted immediately after the deal was announced. But it is still a fairly wide discount, suggesting at the very least that arbitrageurs remain uncertain about when the acquisition will close. The confidence Bayer’s CEO expressed on July 27 that, as Bayer has always hoped, it will close before the end of 2017, does not seem to have impressed traders who might put their money on the line. If it had, it is unlikely that they would leave what he suggests is an unleveraged, annualized return of 21.5% on the table. Since arbitrageurs are generally leveraged three or four times, they would turn that into a 60% to 80% return over five months.
However, timing is only one concern. In light of the concessions extracted to achieve regulatory approval for the Dow/DuPont and ChemChina/Syngenta transactions, the value of Monsanto to Bayer could end up falling short of the consideration Bayer has offered for it. Sufficiently onerous regulatory demands — involving pieces of Bayer’s existing business as well as parts of Monsanto’s — could subtract enough value from the proposed combination to kill it. Abbink said he was not aware of anyone predicting this, but that it is by no means impossible.