Looking for the cheapest way to play a higher bid for buyout target Genzyme Corporation (NASDAQ: GENZ)? Then we have the options trade for you.
Sanofi-Aventis (NYSE: SNY) has put a $69 bid on the table for the biotech company. Genzyme called this “opportunistic,” and said it undervalues the company. It seems management is keen on remembering that the stock saw a high above $80.
But you need to be realistic about the value of Genzyme. It was not a weak stock market that led to Genzyme’s fall from grace. It was manufacturing issues, including a virus and particle contamination in drugs, both of which are leaving more room for competition to continue to build up a stronger base.
Genzyme may be worth the old high if there is a strategic fit that opens new markets and new capacity for a buyer. The company said it wants competing bids, but getting those bids is not so easy for a larger company if it cannot conduct proper due diligence. It’s hard to say whether Genzyme’s issues are permanently fixed.
The real risk for Genzyme is that Sanofi-Aventis (and its large competitors) will look farther down the biotech shopping aisle for cheaper companies with fewer problems. Many mid-cap biotechs could become acquirers’ focal points rather than a $19 billion company. If Sanofi walks away, and if there are no other buyers, Genzyme holders buying today are paying a substantial premium for a company that was valued in the low $50s before the buyout offer surfaced.
But if the company does receive better offers, options traders could benefit with the GENZ Sept 75 Calls at 24 cents, which should bring about a penny a day of premium erosion as the time value decays as we approach expiration on Sept. 17.
These are speculative calls, and only rank third in the most active stock option strike prices for September, after the $70 and $72.50 calls. But while the $75 call strike is aggressive, this is offset by the low 24-cent premium. And even though there is not much time, the strike does actually have a chance of being hit.
Sanofi’s conference call today was not much help in guessing whether a higher bid is coming. The company has said it won’t overpay, but if it offers up, chances are it won’t be just $71 per share. The bid will have to go higher.
If a higher bid does not emerge, then the downside in this trade is that full premium paid. With the premium for the GENZ Sept 70 Calls at $1.42, and 59 cents for the $72.50 calls, the low premium of 24 cents for the $75 strike offers the most upside for the lowest premium per contract.
Follow Jon Ogg on Twitter @jonogg.
Double Your Money on the Rumor AND the News — Learn how to cut through the rumor and manipulation surrounding corporate earnings announcements and bank money-doubling option trades all year long. Download our FREE trading guide here.
