Bayer’s is ripe for a split
2023.01.11 08:35
Bayer’s is ripe for a split
By Tiffany Smith
Budrigannews.com – The Bayer (BAYGn. The DE) crop of growing businesses seems ready for a break. The $58 billion drugs-to-seeds conglomerate has traded at a significant discount to its components for years but has refused to change. However, now may be a better time for activists like Jeff Ubben’s Inclusive Capital Partners to demand a breakup.
Since its disastrous $66 billion acquisition of Roundup producer Monsanto in 2018, Bayer has consistently performed poorly. Soon after an expensive takeover, claimants filed a slew of lawsuits alleging that the group’s weedkiller caused them cancer. The stock has suffered as a result of persistent disappointment and a cumbersome conglomerate structure, prompting Bernstein analysts to advocate for a breakup. The activist Ubben isn’t the only one who sees value: In 2019, Elliott Advisors purchased a stake. Bluebell Capital Partners, a smaller rival, has also recently invested.
The case for a split is clear based solely on the numbers. Assume that Bayer’s core seeds business is worth 13 times its pharmaceutical unit’s 2023 EBITDA, which is comparable to peers. They would be worth 50 billion euros and 88 billion euros, respectively, according to UBS forecasts. Using Reckitt Benckiser’s (RKT.L) 12-time multiple, its smaller consumer drugs division could fetch an additional 18 billion euros. Bayer’s equity could be worth nearly 110 billion euros if they are taken into account, in addition to debt, pension obligations, and an additional 6 billion euros of future Roundup litigation costs. That is nearly double the market capitalization at the moment.
However, Bayer’s numerous difficulties also made a split difficult: For instance, the drugs unit has been overshadowed by the imminent expiration of exclusivity on the blood thinner Xarelto in 2026. That is shifting: The German company now believes that 5 billion euros in annual sales from a new drug against dangerous blood clots could offset the decline of Xarelto. Drugmakers with a lot of money might now find that division more appealing. In the meantime, the crop science industry, which focuses on genetically modified seeds, is well-positioned to take advantage of concerns about food security brought on by the war in Ukraine.
Another reason the activists’ timing is advantageous is Werner Baumann, the company’s current chief executive, will step down in 2024. He was responsible for negotiating the Monsanto deal. As a result, the funds have a chance to influence the next CEO and cause a breakup. Much depends on who succeeds Baumann. The share price may recover with the help of a credible figure. But even more activists are likely to come knocking if Bayer sticks to its cumbersome structure and its stock continues to lag.
On January 9, Inclusive Capital Partners, led by seasoned hedge fund veteran Jeffrey Ubben, announced that it had acquired a stake in Bayer worth 0.83 percent, as the German pharmaceutical and agricultural company’s share price continues to decline.
According to sources cited by Bloomberg on January 10, activist investor Bluebell Capital Partners has also acquired a stake in Bayer and is advocating for the company’s dissolution.
On January 10, Bayer stated that the experimental blood clot and stroke medication Asundexian could generate peak annual sales of more than 5 billion euros. One of Bayer’s pharmaceutical bestsellers, Xarelto, is expected to lose protection from important European patents in 2026, and the medication may assist in replacing that revenue.
Since the disclosure of Ubben’s stake on January 9, Bayer shares have gained more than 9%.
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