Bayer’s 2018 acquisition of US crop science company Monsanto is the takeover that just keeps on taking. This week’s €2.5bn impairment charge adds to already extensive financial damage. It will reinvigorate activist demands for a break-up.
Bayer paid $65bn for Monsanto assets that included a glyphosate weedkiller called Roundup. Management initially underestimated the high cost of an accompanying health scare, as managements typically do. Allegations that Roundup is carcinogenic have prompted numerous lawsuits.
Bayer trades at a depressed enterprise valuation of about 7 times forward ebitda. Change may now be in the air. Werner Baumann, the chief executive responsible for the Monsanto purchase, has stepped aside after a long period of poor share price performance. Replacement Bill Anderson started last month. As a former Roche executive, his expertise is drugs, not weedkillers.
A couple of things look odd about the impairment. First, it is relatively small, given that Bayer has about €39bn of goodwill on its balance sheet, more than half of which derives from the Monsanto acquisition. Second, Bayer blames a weak glyphosate market, which might be a temporary phenomenon, for the writedown. About 60 per cent of world sales are generic products, most of which are made in China.
Anderson will hopefully substitute signal for noise when he presents earnings on August 8. He should signal whether a restructuring is likely. Activists Inclusive Capital and Bluebell have called for this. They favour a spinout of the crop science unit, a business that troubles environmental, social and governance investors.
That would make sense. Even at 10 times next year’s ebitda, a sixth cheaper than rivals FMC and Corteva, Bayer’s crop science unit should be worth about €60bn, 2024 Visible Alpha estimates imply — albeit undiscounted for a long tail of legal claims. Compare that with the group’s total enterprise value of €86bn.
Bayer has argued that cash flow from crop science and its consumer health unit help fund its growing pharmaceuticals pipeline. But Bayer’s persistently low multiple against agrochemical and pharma peers underscores the need for change.
Anderson wishes to boost pharma, for example, by removing centralised research budgeting. But that could take years to lift the group’s low valuation. Like all incoming bosses, he has a brief window to cut loose a problem division. He should exploit it.