October 2, 2020

Breakingviews: Bayer’s dismal M&A harvest boosts breakup pressure

by Breakingviews.

Denial can often make tough choices more painful. That appears to be the problem facing Bayer Chief Executive Werner Baumann, whose company lost nearly 13% of its value after it warned of stagnant sales next year. With all its units misfiring, the logic of keeping the 47 billion euro drugs-to-seeds business together is getting harder to justify.

Bayer has yet another reason to rue its Monsanto acquisition. The $66 billion purchase of the Roundup maker in 2016 sparked a wave of lawsuits from customers that claimed the weed killer gave them cancer. In June, Baumann agreed to pay nearly $11 billion to settle the case even though it still claims the product is perfectly safe. On Wednesday, Bayer said the pandemic had a worse-than-expected impact on the crop science division acquired from Monsanto.

The news caught investors off guard. Although the impact of the pandemic cannot be helped, the bigger problem is that Bayer’s dominant position in the $4 billion soybean market is under threat. Rival Corteva expects to make up 20% of the U.S. crop in 2020, the first year its new seed has been widely available.

Crop science isn’t the only Bayer unit that needs nurturing. Its consumer business, which includes indigestion and hay fever brands Rennie and Claritin, may come under pressure from online retailers, and rivals GlaxoSmithKline and Pfizer are merging their divisions. Selling it to, for example, Reckitt Benckiser is one option. The pharmaceutical business is facing a patent cliff, as blood-thinner drug Xarelto loses exclusivity. It needs to invest more and buy new drugs.

Baumann has pledged to cut costs and sell some assets. Yet the latest woes show there are few obvious benefits to keeping his different business together. And the economic case for a breakup is compelling. Bernstein analysts reckoned in a July report Bayer’s shares could be worth 93 euros if its different units were separated and sold off or listed, over 90% above the current level. On Wednesday, Baumann refused to entertain discussions of a breakup. Yet investors, tired of their poor yield, are likely to increase calls for radical action.

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