This week or next, a proposed deal in which Bayer AG (BAYRY, Financial) would buy the Monsanto Company (MON, Financial) is expected to get the nod or get the boot.
If the deal goes ahead, it would be one of the biggest ever, consolidating two of the world's six agricultural giants. But even if the two sides agree on a price and the details, which Bayer has tried twice already, they will have to run a gauntlet of farmers and regulatory officials.
Not that Monsanto is a stranger to controversy; it’s attracted a lot over the years, especially since it became a leader in the field of GMO (Genetically Modified Organisms). Still, this deal isn’t about GMOs, it is about synergies between the world’s biggest seed company (Monsanto) and the biggest ag chemical company, Bayer. Coincidentally, both companies also place in the top six for chemicals and seeds as well; Monsanto in chemicals and Bayer in seeds.
Who Owns Monsanto Now?
This overview from GuruFocus outlines the near-current ownership of Monsanto (current as of June 30, 2016):
As we can see, institutional investors (pension funds, mutual funds) own a hefty piece of MON, while insiders own less than one-half of one percent. Short interest is negligible, so the market does not seem to expect the Monsanto share price to suffer much, whichever way the dealing goes.
Among the gurus that GuruFocus follows, 29 have holdings in Monsanto. PRIMECAP Management (Trades, Portfolio), with 11,370,263 shares, has the biggest position. Larry Robbins (Trades, Portfolio) and Frank Sands (Trades, Portfolio) have the second and third largest positions; altogether 11 gurus hold more than 1-million shares each.
Five institutionals not followed by GuruFocus have holdings larger than PRIMECAP, according to NASDAQ.com: Vanguard Group Inc., State Street Corp (STT, Financial), FMR LLC (Fidelity), Massachusetts Financial Services Co. and Capital Research Global Investors.
How Have the Gurus Reacted?
While we don’t have anything on the forthcoming bid by Bayer, it may be instructive to look through the gurus’ activities in the second quarter of this year, which includes Bayer’s second bid for Monsanto in May. Here is a summary of the five biggest holders:
Next, we have a graphic view of what PRIMECAP has done with its shares; it has been steadily trimming its holdings since the share price got close to the $120 mark in the first quarter of 2014. Presumably, PRIMECAP does not see much changing because of Bayer, since it has consistently been taking profits:
Larry Robbins (Trades, Portfolio), the second largest holder among the gurus, cut his holdings by almost 3-million shares in the first quarter of 2016, a reduction of 22%. Then in the second quarter of this year, he reduced his holdings by another 300,000 shares, this time a reduction of 2.7%:
Frank Sands (Trades, Portfolio) has cut his holdings each quarter since the second quarter of 2015. Again, the chart indicates a trimming approach, as if taking profits:
Chris Davis (Trades, Portfolio) got out of Monsanto altogether for a couple of quarters, but then came back in the third quarter of 2015, buying more than 7-million shares. With that position established, he began cutting back again, throughout the period when Monsanto might have been sold to Bayer:
Manning & Napier Advisors began a slow reduction of its MON holdings in the fourth quarter of 2014, and has continued to reduce the share count since then:
Caveats: all of the charts and data here come from the first half of 2016, and before. Of course, we’re nearly finished the third quarter of 2016, but that data for this quarter won’t become available until after the end of September. All of which means we’re not entirely up to date with the gurus; perhaps one or more of them has changed direction since the end of June.
Comments: The big five among the gurus holding Monsanto stock apparently have the same idea about the company. They seem to be taking profits while talk of a buyout has lifted the stock price; they did not position themselves for capital gains if the Bayer plan succeeded.
Side Bets?
Along with the gurus listed above, GuruFocus also lists five gurus who have taken what we might call side bets.
Four gurus have bought call options and one bought put options.
Call options act like somewhat like shares, until they expire. If the underlying stock goes up, the call options go up, although not necessarily on an equal basis. Put options are the equivalent of going short on the stock; their value will increase as the share price decreases.
The reason some investors, including the gurus, buy options rather than stocks is because they can make a dollar go a lot further. For example, after the close of trading on Monday, Sept. 12, the MON share price sat at $106.01. But, the $115 call option for Jan. 20, 2017 sells for just $2.00 (the Ask price). Here is a portion of the call option chain (table) from Yahoo Finance:
So, if you think the price of MON will hit $115 before Jan, 20 next year, call options would give you leverage of about 53.5 times on the current share price. Nice trade if you can get it, but remember the clock is ticking every day, and unless the Monsanto share price moves up solidly, you could be left with nothing.
The same holds for put options, another way to short a stock that you expect will fall in price. Lots of leverage available, but you want to be confident something will happen before your options expire.
Here are the guru option positions, from the guru trades page for Monsanto:
One of the five gurus, Alan Fournier (Trades, Portfolio), sold 700,440 shares of Monsanto, while adding 500,000 call positions. That set of transactions would allow him to keep some upside exposure, while radically reducing his stock position.
Caveats: You will have noticed no data about expiry dates or strikes; those are not provided. And, we don’t know if, or how far, those positions extended beyond the end of the second quarter of 2016.
Comments: Three the five gurus with option positions are bullish on the deal; buying call options shows they expect the share price to move up before their calls expire. Louis Moore Bacon apparently expects the share price to fall, likely as a result of a deal failing to proceed, and Alan Fournier has one foot in the door and one foot out.
One Guru’s Opinion
Wallace Weitz (Trades, Portfolio) owns 202,190 shares in Monsanto, he had this to say of the company in his second quarter Weitz Value Fund's Value commentary (as reported by Holly LaFon):
Monsanto (NYSE:MON) is a provider of seeds and biotech traits for corn, soybeans and cotton. Bayer, a German Life Sciences company, proposed acquiring Monsanto in the second quarter in what is a rapidly consolidating agricultural seeds and chemicals sector. Monsanto ultimately rejected Bayer’s initial offer of $122 per share as financially inadequate, but discussions remain ongoing. We have long viewed Monsanto as the highest quality franchise in agriculture, a view validated by Bayer’s acquisition proposal. The company’s earnings power is currently facing a number of headwinds, including currency effects, low commodity prices, regulatory delays and longer product introduction cycles. Nevertheless, we view its technology and research & development pipeline as second-to-none, which should allow it to create double-digit earnings growth from 2017 through 2019.
Comment: For Weitz, this is a very good company, worth holding whether a deal goes through or not.
Conclusion
While caveats figure prominently in the analyses above, they are simply that, caveats to the bigger story.
By the end of the second quarter of 2016, Bayer had already made two runs at the Monsanto Company, at prices well above market. Yet, the during that same period, the gurus lowered rather than raised their exposure to the name.
It’s true that three other gurus may have positioned themselves for a buyout by getting their funds into options: three of them bought calls, one bought puts. And, one sold stock and bought call options. Overall, it seems they’re more optimistic about a deal than the gurus who have bought and sold stock.
On the whole, though, the option positions seem more like speculation than committed investments. If forced to make a choice with real shares, I’m sure I would follow those with stock positions rather than those with option positions.
Getting back to the title that launched this article, the five gurus with the biggest holdings in Monsanto appear to believe a buyout will not occur. Or perhaps they believe that while a deal may be possible, it is unlikely to overcome the regulatory hurdles.
In any case, we may know Bayer’s intentions, and perhaps Monsanto’s response, in the next couple of weeks. And in October we should begin seeing data for the third quarter, which will tell us whether the gurus were wise to trim their positions.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the foreseeable future.
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