A buyout announcement is one of the best pieces of news a shareholder can get. Typically, buyout stocks immediately jump to within cents of the buyout price and never look back. Sometimes, however, the market doesn’t trust that the deal will actually go through. That skepticism can leave certain buyout stocks in limbo for months.
Donald Trump was elected on a pro-business platform that promises a reduction in government interference in corporate affairs. On the surface, that attitude seems to be good news for the M&A environment.
Trump’s policies should encourage aggressive M&A activity. He has promised to cut taxes and has discussed a repatriation holiday to allow companies with cash stored overseas to bring that money back into the country.
That’s all good and well, but it doesn’t mean companies will be free to combine at will if mergers threaten competition. In fact, Trump himself has criticized the proposed AT&T Inc. (NYSE:T) merger with Time Warner Inc (NYSE:TWX) as being “an example of the power structure I’m fighting.”
Here are three buyout deals that the market is very skeptical about.
Buyout Deals That Could Fail: Cigna Corporation (CI)
Cigna Corporation (NYSE:CI) shares jumped 12% when rival Anthem Inc (NYSE:ANTM) announced a $48 billion buyout back in June 2015. The buyout price of the deal is around $182 per share, yet CI stock peaked at around $170 in the days following the announcement. CI stock quickly reversed and has spent much of the time since the announcement trading in the $120 to $150 range.
Investors were understandably skeptical of the merger of two of the largest healthcare providers in the U.S. Sure enough, the Justice Department sued to block the deal on antitrust grounds.
“If the judge blocked this deal, there is very little, if any, chance that the Anthem-Cigna deal gets cleared,” Bloomberg Intelligence analyst Jason McGorman said following the news. It looks like this deal may be toast. If the deal goes through, CI stock could see 24% upside. If it falls through, CI stock could be headed down 7.4% to its $137 pre-deal level.
Buyout Deals That Could Fail: Rite Aid (RAD)
The proposed merger between leading drugstore chains Rite Aid Corporation (NYSE:RAD) and Walgreens Boots Alliance Inc (NASDAQ:WBA) is chock-full of drama. The deal raised a lot of eyebrows when it was announced in October 2015. Sure enough, the Federal Trade Commission (FTC) quickly stepped in to review the deal.
The original buyout terms seemed like a great deal for the struggling RAD. Shares initially jumped from around $6 to $8.75 when WBA revealed a $9 per-share buyout price. In December, the companies divested 856 Rite Aid stores to competitor Fred’s Inc. (NASDAQ:FRED) for $950 million in cash. WBA and RAD were hoping that these asset sales would help convince the government the combined company wouldn’t have too dominant a market position.
Unfortunately, there may need to be additional asset sales before the deal gets the green light. As a result, WBA revealed updated buyout terms, including a dramatically lower price range. WBA will pay $7 a share if less than 1,000 total RAD stores must be divested and as little as $6.50 per share if more than 1,200 stores must be sold off.
Still, RAD stock may be a bargain at its current share price of around $5.25. The stock is currently trading below its pre-buyout price, and WBA seems committed to doing whatever it takes to get the deal done. Even at the low end of the buyout price range, the stock should still jump nearly 24% to $6.50.
Buyout Deals That Could Fail: Monsanto (MON)
The combined company would capture roughly 25% of the global seed and pesticide businesses. The two companies will have to convince regulators in the 30 countries in which they do business that that large market share won’t impact food prices or agriculture competition.
Wall Street is certainly not convinced. The buyout price for MON is $128 a share, yet the stock currently trades at just $109 a share. If the deal goes through, MON stock has 17.4% potential upside.
However, if the deal is blocked, MON could be headed back to its pre-buyout level of around $87. With a huge regulatory headache ahead, the potential for massive divestitures and the possibility of 20% downside if the deal gets rejected, MON stock is not worth the gamble.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.