Bayer needs a break from the past – not a break

Bayer needs a break from the past – not a break

Bayer needs a break from the past – not a break

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Attracting big-name activist shareholders is easy for Bayer AG, the drugmaker known for its disastrous $66 billion acquisition of Monsanto in 2018. Following in the footsteps of Elliott Management Corp. nearly four years ago, Inclusive Capital Partners LP this week disclosed a sub-1% stake, while Bloomberg News revealed that Bluebell Capital Partners also amassed a stake.

The challenge, as always, will be to get other shareholders to half care about Bayer’s potential. Many have long since given up.

The deal with Monsanto has earned the company a lengthy legal battle over claims that herbicide products containing glyphosate cause cancer. The managing director who led the transaction, Werner Baumann, remains in place. But his contract expires next year and the board has begun looking for a successor, Bloomberg New reported in September. One would expect shareholders to try to influence the process or use the transition period to set the agenda.

Inclusive Capital is not your usual activist. It focuses on ESG. This explains his interest in a company whose strategy is based in part on food safety. The environmental and social aspects of the ESG moniker should be central to Bayer’s focus. Sustainable agriculture is a key priority. And good governance – the G – is the key to delivery.

Bluebell’s interest seems more conventional for an activist. He seeks the oft-talked-about solution – a break that undoes an unusual model that combines crop science and pharmaceuticals.

For the market, the focus is on Monsanto’s litigation legacy. An initial settlement of $11 billion has left some uncertainty over the final bill to end the claims. (Bayer says it “fully supports the safety of our glyphosate products.”)

Bayer is Europe’s cheapest leading pharma stock, trading at less than 7x estimated earnings before interest, tax, depreciation and amortization (Ebitda) in 2023 within a sector representing around 12x. The market capitalization would be about 21 billion euros ($23 billion) higher than its 53 billion euros at Tuesday’s close if the shares traded at the brokers’ average price target.

The optimistic analysts’ targets reflect a high theoretical valuation of the components of the company. The agricultural and pharmaceutical businesses are each expected to generate more than €6 billion in EBITDA in 2023, with the smallest consumer healthcare company expected to generate around €1.4 billion, according to Bloomberg forecasts. The back-of-the-envelope valuation involves the application of peer-review multiples to these benefit streams – say around 13 times for crop science, a conservative 8 for pharmaceuticals and 11 for health consumers.

This would suggest an enterprise value of around €145 billion. Deduct net debt, pension deficit, remaining provisions for glyphosate litigation and shared costs, and you could have a net worth of around 90 billion euros before applying a conglomerate haircut.

A weak stock price is a problem: it hampers management’s ability to get things done. But dismantling the company, with all its disruptions, does not appear to be the immediate way forward. Jeff Ubben, the former ValueAct campaigner behind Inclusive Capital, told the Financial Times that this should be an option rather than a necessity. Makes sense.

A complete dismantling would be costly in terms of expense and management distraction. One of the separate companies should rebuild central functions that are currently shared. Delineating glyphosate-related liability in one part of the business would not rid shareholders of exposure.

Bayer’s domestic competitor, Merck KGaA, has more than doubled in value over the past five years, even though its business combines pharmaceuticals and chemicals. It’s true that a less drastic corporate finance deal would help Bayer, including a sale or listing of the consumer healthcare business (one of Bluebell’s proposals). Proceeds could reduce debt.

Investors are already aware of Bayer’s coin sum valuation. A breakup would not in itself solve its fundamental problems – the lingering uncertainty about Monsanto’s liability and management’s lack of credibility. The first will become clear over time. As for the latter, it is difficult to see how a leadership linked to the past can regain the confidence of investors. No wonder Ubben wants an external appointment to replace Baumann. For its part, Bluebell wants a new president, Bloomberg News reported.

Under German company law, CEOs have enormous power to act without consulting shareholders. Baumann was able to do the Monsanto deal without having a shareholder vote. He was also able to survive protest votes against his leadership. Hence the premium now on the credibility of management. Bayer needs a break with the past, not a break.

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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering the deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

More stories like this are available at bloomberg.com/opinion

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