Bristol-Myers' Buyout Price? $28.35 Or Less to Options Prices

The talk of IF Bristol-Myers Squibb (BMY-NYSE) is really going to be gobbled up by Sanofi-Aventis (SNY-NYSE/ADR) hasn’t gone away, but the dust is settling.  We covered the ‘media reports’ and what it would look like earlier today, but there is a more interesting aspect of this potential merger.  Now that all of the trading bets have been made and the dust has settled, what do options traders think about the prospects from here?

The stock traded above $28.00 today but has settled in around the $27.65 level around 2:00 PM.  Oddly enough, this is right around that $27.50 options strike price.  The FEB07 $27.50 CALL options are trading at $0.85 and the same PUTS are trading at $0.60.  Here is the problem: that generates only an approximate expected premium of $0.70 to current prices and that would be less than 3% higher.  Sure the stock is up 5% today and up 35% now from 52-week lows, but this also gets it back to above its year-highs.  The fundamentals aren’t substantially different than they were before today, so buying today on hopes of a deal announcement any time in the next two to three weeks may have a poor risk-reward ratio.  After flipping the scenario to PUT options the price expectation looks almost identical.

Since their CEO was booted it has been speculated and rumored for some time to be a potential target company.  We’ll see, but now that the stock has moved more than 5% it doesn’t look like a huge premium would be expected from current prices in a deal.  The short interest in BMY shares in December was 22.7 million and that shrank to 18.45 million in January.  Bristol-Myers Squibb has a market cap of roughly $54 Billion at current market prices.  Sanofi-Aventis (SNY-NYSE/ADR) shares are down 1.6% at $44.60, and its market cap is $120 Billion.

Jon C. Ogg
January 29, 2007