Bayer, facing more Roundup suits, yields to shareholder request for M&A review

In its 2019 annual report, Bayer said it may need to cover potential Roundup settlements by selling off assets “possibly on unfavorable terms” or by issuing additional debt or raising equity capital. (Bayer)

As investor criticism continues to swirl around Bayer’s takeover of Monsanto in light of the Roundup legal crisis, the company’s under-pressure management has made a concession ahead of the upcoming annual meeting by agreeing to a review of its rules for evaluating mergers and acquisitions. 

The agreement was reached with corporate governance expert Prof. Christian Strenger, a Bayer shareholder and former CEO of DWS Investment, Germany’s largest asset manager. He proposed such an investigation into the Monsanto transaction at the company’s annual meeting last April. The motion was defeated at the time, with 25.7% of investors in support.

Now, as plaintiffs claiming Monsanto’s Roundup weedkiller caused cancer have surged to about 48,600 as of Feb. 6, Bayer management had decided to meet Strenger’s demand.

Bayer will allow a “special audit” of its “existing specifications and requirements for conducting due diligence on major M&A transactions in the future,” the company said in a statement. Strenger selected—and Bayer backed—Prof. Hans-Joachim Böcking of the University of Frankfurt to conduct the assessment, Bayer CEO Werner Baumann explained at a press conference Thursday.

An independent lawyer, James Irwin in the U.S., has already carried out a separate review of the opinions that Bayer obtained ahead of the Monsanto deal over potential litigation risks around Roundup products. According to Bayer, the conclusion was that the opinions “thoroughly address and appropriately assess” the risks.

What’s more, two separate reports prepared by external lawyers at the end of 2018 and early 2019 also concluded that Baumann’s exec team acted dutifully when deciding on the $63 billion acquisition, the company said.

Seemingly trying to win over investors before the upcoming annual meeting in April and avoid an embarrassing no-confidence vote like the one it got last year, Bayer intends to publish those reports by the end of March.

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The news comes as the company’s chairman, Werner Wenning, who has always publicly backed Baumann and the Monsanto acquisition, is planning to step down in April. He will be replaced by Norbert Winkeljohann, a former chairman at PricewaterhouseCoopers Europe who joined Bayer’s board in 2018. During the press conference, Baumann called the transition “business as usual” and assured investors that the board would continue to support his leadership team.

Lawsuits linking Roundup to cancer have mushroomed since Bayer folded in Monsanto. The most recent tally of 48,600 marked a rise from 42,700 in October. Bayer is appealing rulings in the three cases it has lost and has repeatedly assured the public that the glyphosate-based herbicide is safe.

Bayer is also engaged in a court-ordered mediation to explore the possibility of a settlement. During Thursday’s press conference, Baumann declined to provide any details on the process or potential size of a settlement, citing confidentiality. To hear Baumann tell it, the negotiation may drag on for some time.

“If we accept certain deadlines, most likely we will not come up with the optimal result for our company and for our shareholders,” he said. “So, there is no specific timeline.”

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In its 2019 annual report published Thursday, Bayer said it may need to cover settlements by selling off assets “possibly on unfavorable terms” or by issuing additional debt or raising equity capital.

CFO Wolfgang Nickl described the statement as considering “all theoretical possibilities irrespective of the probability.” At the end of 2018, Bayer said it was targeting a total of €23 billion ($25.2 billion) in free cash flow between 2019 and 2022. Now with its expected $7.6 billion sale of the animal health franchise to Elanco and its Currenta divestiture, Bayer sees “some flexibility” out there, Nickl told reporters.

Investors have questioned Baumann’s deal-making wisdom and pressured his team to bring a close to the Roundup cases as soon as possible, as they worry the legal—and potentially financial—burden will hurt the business.

That’s why the company launched a restructuring toward the end of 2018, with the aim of annual cost savings of €2.6 billion from 2022. Last year, Bayer achieved 30% of that target, Nickl said, and it plans to reach 50% in 2020. Another part of the overhaul involves cutting 12,000 positions worldwide. In 2019, the company reduced its headcount by about 4,000, the CFO said.

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So far, Bayer’s business looks solid. Fourth-quarter group sales reached €10.8 billion ($11.8 billion), 1.1% ahead of analysts’ expectations, according to Bernstein. Pharmaceutical sales totaled €4.7 billion ($5.2 billion) during the period, as anticoagulant Xarelto’s €1.15 billion and eye med Eylea’s €667 million came in above consensus by 3.6% and 1.5%, respectively.

Newer cancer drug Stivarga delivered €106 million to Bayer’s Q4 top line. Despite 23.3% year-over-year growth, the drug’s performance missed consensus by 1.5%, and its older sister drug Nexavar also disappointed industry watchers by 2.5% amid U.S. competition with sales of €164 million.

All told, the pharma unit racked up sales of €17.96 billion ($19.70 billion) in 2019, up 5.6% on a portfolio- and currency-adjusted basis. For 2020, the company expects pharma sales to grow at 3% to 4% on an adjusted basis, which is in line with the consensus of €18.6 billion.