Professional teams are well known for “eating” bad contracts, and now it looks like German pharmaceutical company Bayer AG (XTER:BAYN, Financial) is following suit. Rumors abound that CEO Werner Baumann is going to be asked to turn in his playbook quickly.
Investors hope Baumann’s successor has a plan that will boost the conglomerate’s share price, which has languished under his watch. Since 2016, when he took over the top job, the company has lost about half its market value while the Global X DAX Germany ETF (DAX, Financial) has climbed a few points.
While he already announced he will not be seeking to renew his contract when it expires in 2024, it appears Baumann may not be around much longer if the rumor mill is accurate, as the company is likely to pull the plug on his reign any day now. Bloomberg reported Chairman Norbert Winkeljohann is considering candidates both inside and outside the company, shooting to have a new CEO in place by Bayer’s next shareholder meeting in April 2023.
Baumann’s undoing in great part is tied to the mammoth problems that accompanied the company’s $63 billion acquisition of Monsanto in 2018, which followed a rugged buyout fight and strong antitrust scrutiny. Looking at it from today’s vantage point, the deal is likely to go down as one of the worst in history. Bayer’s market cap is about $10 billion under what it paid for Monsanto.
Not only did Bayer pay too much for Monsanto, but it also inherited lawsuits from thousands of Americans who said that the U.S. company’s Roundup weed killer gave them cancer. As of May 2022, Monsanto has reached settlement agreements in nearly 100,000 Roundup lawsuits at a cost of approximately $11 billion. Bayer has accomplished this by negotiating block settlement arrangements with plaintiffs’ lawyers who have large numbers of cases in litigation, according to the Lawsuit Information Center.
Although these settlements account for nearly 80% of all pending Roundup claims, there are still about 26,000 to 30,000 active Roundup lawsuits. Most lawsuits have been filed in state court, but there are still over 4,000 claims in the MDL Roundup class-action lawsuit pending in California.
Even though things look bleak, perhaps it is true that “It’s always darkest before the dawn.” I’m banking on the new CEO breathing life into Bayer and have gone out on a limb and purchased shares. After all, even if the stock holds at its current price, its dividend yields more than 4%, which is still attractive in today’s environment.
Maybe the new CEO will heed investors’ suggestion that the company break up its pharma, crop science and consumer health divisions, an idea that has been nixed by Bayer’s management. But the numbers are compelling.
It is estimated the drug unit might be worth $62 billion on a 10 times 2022 Ebitda multiple, a discount to the sector due to its weak pipeline. On an11 times multiple – a slight discount to Corteva Inc. (CTVA, Financial) agriscience-- Bayer’s crop sciences division could be valued at $63 billion. Adding $13 billion for the consumer health care unit, and Bayer’s enterprise value would be about $138 billion. After subtracting net debt, pension liabilities and Roundup claims, equity would be about $90 billion, a far cry from where it is today.
