Bayer turns bearish on concerns over Monsnato acquisition


Chemical and pesticide company Bayer AG (XETRA: BAYN.DE; OTC: BAYRY, BAYZF) reported fiscal 2017 second-quarter net income of €1.224 billion, or €1.40 per share, on revenues of €12.193 billion ($13.4 billion). That was lower than Consensus for earnings of €1.30 billion on revenues of €13.19 billion ($14.5 billion).

The company also trimmed its FY17 revenue outlook to €49 billion, from €51 billion guidance issued earlier. Still, the stock managed to gain about 2% in the past month to close at €110.10 last week.

We anticipate selling to begin in the stock due to reasons given below.

The Leverkusen, Germany-based company said last week that it would complete the acquisition of Monsanto only in early 2018, instead of the end of 2017. Bayer has clarified that the delay would be only due to the time taken for the thorough evaluation of the $66 billion deal.

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The pesticide maker has submitted an application to the European Commission to extend the review deadline by ten days. If that gets accepted, then the new deadline will be January 22, 2018. Bayer pointed out that it has already received approvals from one-third of the 30 regulatory authorities to which it had submitted an application for clearance of the deal.

European laws do not permit monopoly. To ensure competition, Bayer has to divest a portion of its business where Monsanto also has a presence. Bayer has identified an overlap in herbicide, traits, and seed business. Liam Condon, a Bayer Board member and President of the crop science division, stated that Bayer will continue to discuss the details with the authorities and divest where ever necessary to ensure a healthy competition.

The European Commission is also probing the Bayer-Monsanto deal and would announce its final decision on January 8, 2018. The Commission is also in touch with other regulatory bodies that are currently reviewing the deal. This includes the US Department of Justice and antitrust authorities in Brazil, South Africa, Canada, and Australia. An in-depth investigation was started last month, after the Commission expressed concerns over a probable lack of competition in several pesticide and seed markets. In particular, the EU has named Monsanto’s weed killer glyphosate, which competes with Bayer’s glufosinate, canola seeds, and cottonseed licensing technology.

Analysts are of the opinion that the deal might slow down the development of new products. Additionally, analysts are also concerned that the EU may try to control Bayer’s combo offer of seeds and pesticides. Bayer’s global research & development head, Adrian Percy, has clarified that the company is investing €1 billion per year in R&D and expects launching 15 new products by 2020. Still, concerns over the final structure of the combined company, after the completion of divestments, is expected to keep the stock bearish in the short-term.

The stock is also moving below the descending trend line resistance, as shown in the price chart below. The stochastic oscillator is also on the verge of crossing below the reading of 50. That indicates selling pressure in the scrip. So, it would be wise to stay short in the stock, at this point in time.

Bayer Stock Price: September 26th 2017

From one of the binary brokers listed here, we may purchase a put option to benefit from the decline in the stock’s price. In that case, we will select a contract which remains active for a week. A strike price close to €111 would increase the chances of success in the trade.