Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Traders wagering that Monsanto Co. will complete its $66 billion sale to Bayer AG are in good company. The bet just got a big endorsement from Berkshire Hathaway Inc.

Warren Buffett's conglomerate disclosed late Tuesday that it had amassed a stake of about 8 million shares in Monsanto during the fourth quarter. That would mean Berkshire was buying after the seed giant had agreed to Bayer's $128-a-share all-cash takeover offer.

The quickest and cleanest way for Berkshire to realize a return on its investment would be for that takeover premium to be fully realized with a deal that's approved by both shareholders and regulators -- especially because Berkshire's dumping of its stake in tractor maker Deere & Co. signals it's not too keen on the agriculture industry as a stand-alone investment. 

It's a merger arbitrage play, essentially, on a deal that's far from a slam dunk.

Arb Play
As the companies try to circumvent regulatory obstacles, the deal's arbitrage spread remains wide, with current levels implying only about 40% odds of success
Source: Bloomberg

The gap between Monsanto's share price and Bayer's offer was about 19 percent as of the close of trading on Tuesday. That's not the widest among major North American takeovers, but it's near the top of the list, according to data compiled by Bloomberg. To put it another way, traders are giving the deal only slightly better odds than Walgreens Boots Alliance Inc.'s purchase of drug-store rival Rite Aid Corp. -- and in that case, the companies slashed the price and adjusted the terms to include more store divestitures in an effort to win over regulators. 

Bayer and Monsanto are seeking regulatory approval for their tie-up in conjunction with requests from ChemChina for its planned $46 billion purchase of Syngenta AG and Dow Chemical Co. and DuPont Co.'s megamerger. The flurry of activity raises questions about the overall impact of consolidation across the agricultural industry, in addition to the merits of each of the individual deals. While Monsanto and Bayer don't have much overlap, neither do Dow and DuPont. Yet European regulators still zeroed in on the potential negative effects on research and development spending from a Dow-DuPont combination. (The two chemical companies now appear on their way to allaying those concerns.)

Bayer and Monsanto's ability to get regulatory signoff in the U.S. may have improved with the election of Donald Trump, who is generally expected to usher in a regulatory regime with a lighter touch than what was seen under President Barack Obama. After meeting with Trump in January, executives from Bayer and Monsanto promised an $8 billion investment in the U.S. and thousands of new jobs should their merger get approved, hitting all of the sweet spots of what the commander-in-chief likes to hear from corporations.

Monsanto was worried enough about the deal's odds that it negotiated an increase in the breakup fee it would be owed should the transaction get blocked. That amount was $1.5 billion in Bayer's July offer (which was rejected) and $2 billion in the final deal. For its part, Berkshire Hathaway seems confident enough to give a merger arbitrage strategy a spin.

We don't know for sure if it was Buffett himself or one of his stock-picking deputies who made the investment. Either way, he no doubt gave his blessing. When the Oracle of Omaha turns arb, perhaps it's time to follow suit.

--With assistance from Tara Lachapelle 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Berkshire has invested in Dow Chemical as well, but its involvement predated the merger agreement with DuPont. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net