Bayer activist Elliott could push for break-up post-Roundup settlement – sector advisers

Bayer AG activist investor Elliott Management could agitate for a break-up of the German pharmaceutical and agricultural chemicals company after litigation issues surrounding the Roundup brand are settled, according to three sector bankers and a Bayer investor.

Elliott issued a statement yesterday, 26 June, confirming an approximately 2% stake in Bayer, arguing that its share price does not reflect the underlying value of its constituent businesses, or the potential value realisation opportunity in excess of EUR 30bn.

Elliott is not focused on any specific measure at this point, aside from the first step of settling the litigation, a source familiar with the situation said. Post-settlement there could be several potential paths to release value to be explored, the source said.

Bayer has seen its share price fall by around 44% since it acquired US agrichemicals company Monsanto for USD 63bn last year, primarily due to potential liabilities stemming from Monsanto’s Roundup herbicide.

In mid-May, a court in California awarded USD 2bn to a couple claiming that glyphosate in Roundup weed killer caused their cancer. More than 13,000 glyphosate-related plaintiffs are suing with similar claims.

There has been immense shareholder pressure on Bayer management, the bankers agreed, even prior to Elliott’s public disclosure. Bayer’s shareholders voted against a resolution seeking to approve the actions of the company’s management board over the previous year at the company’s late May AGM.

Such resolutions are typically passed with large majorities in Germany and, while the dissent does not have any legal consequences, the supervisory board would not be able to ignore it, the first sector banker said.

Bayer’s CEO Werner Baumann imposed the Monsanto deal on shareholders and has defended it ever since, making him the “symbol” of the transaction, a German M&A lawyer claimed. It would not come as a surprise if he would eventually have to leave, the lawyer and the second banker added.

While there have been no publicly-announced consequences since the May AGM, large shareholders have made it clear that the vote was “a last warning”, the third banker said.

Ongoing glyphosate-related legal cases are putting financial pressure on Bayer, pushing down its share price to six-year lows, three bankers noted. Replacing top managers might drop the share price further, which no one wants to see now, two of the bankers said.

Bayer can only achieve a share price uplift by limiting litigation liabilities, or by selling assets above current multiples, the second banker said.

Monsanto was integrated into Bayer’s agricultural unit, known as Crop Sciences, which posted sales of EUR 6.4bn in the first quarter of 2019, amounting to half of group sales of EUR 13bn for that period.

Splitting Bayer’s CropScience division from its Pharmaceutical business could create the required value, as Pharma would re-rate highly, a fourth banker said. US peer DowDupont recently floated its agriculture business as Corteva, which would make a good valuation comparable for a spun-off CropScience, the first, second and a fourth banker said.

However, the EUR 30bn uplift could be achieved in the medium-term while keeping Bayer together, suggested the third and a fifth banker. Bayer’s stock could reach around EUR 100 per share from the current level of EUR 60, when it emerges from litigation settlements, they agreed.

A break-up could be the next step after that, the third banker said. But, if Bayer carves out agriculture, it would confirm its responsibility in the glyphosate cases and that would be a defeat for management, this banker added.

To secure the acquisition of Monsanto, Bayer had to sell around EUR 7bn of agrichem assets to BASF, a sixth banker noted. Bayer was aiming to be as large as possible in the agricultural sector, so it is unlikely it would try to offload the rest now, this banker argued.

Furthermore, the remaining pharmaceutical business would not be large enough compared to peers, said a legal advisor who has worked with Bayer previously. The strategy of acquiring Monsanto should make sense in the long run, he argued.

Elliott declined to comment on what specific measures it might suggest for Bayer’s value realisation.

Bayer announced a range of portfolio, efficiency and structural measures on 29 November last year which “continues to be valid”, a Bayer spokesperson said.

“The Board of Management and the Supervisory Board firmly believe that this strategy forms the right basis both for Bayer’s economic attractiveness and for the company’s wide-ranging contribution to society,” the spokesperson said. “We’ve continued to systematically evolve this strategy over recent years, underlining the fact that this is the right way forward for Bayer.”

The spokesperson also directed this new service to its most recent statement regarding the advisor it has appointed to help with its litigation issues.

by Sofia Okun, William Mace, Alessandra Castelli, Claudia De Meulemeester and Hanqing Chen.