BAYRY - Bayer AG

[Spekulatius]

I think it ultimately won't amount to $20b. Also the fees will be paid in the far future if you calculate it like that you should probaby discount and the implied fine at this perceived gap is even higher.

 

Won't it also be lower after tax? i.e. $x * (1 - t)

 

And add back a couple billion of legal fees. Also, the US is not the only place where lawsuits will occur, also I think the bulk of the legal liability potential is here.

[Foreign Tuffett]

Ken Feinberg is now involved as a mediator capacity. He is by far the most prominent person in the US doing this type of work, to the extent that he almost has a monopoly on the most high profile cases. I view his appointment as a negative as his involvement usually precedes the company in question (BP, GM, VW are examples from the past decade) disbursing huge amounts of money. 

 

https://www.reuters.com/article/us-bayer-glyphosate-lawsuit/u-s-judge-appoints-ken-feinberg-mediator-for-bayer-roundup-settlement-talks-idUSKCN1SS2CH

 

Bayer has released the below statement

 

https://www.investor.bayer.com/en/nc/news/investor-news/investor-news/bayer-supervisory-board-takes-action-to-address-the-glyphosate-litigation-and-welcomes-the-appointme/

 

 

[UK]

https://www.ft.com/content/a139ef68-b07c-11e9-bec9-fdcab53d6959

 

 

[UK]

https://www.wsj.com/articles/time-to-buy-back-bayer-11566385729

 

"This month, judges in St. Louis delayed two imminent Roundup cases, a move that hinted at progress in talks between the company and plaintiffs. Bayer wants a settlement of between $6 billion and $8 billion while plaintiffs want more than $10 billion, according to a Bloomberg report, though a key mediator denied any discussion of numbers."

 

"Whatever the eventual settlement, it will likely be far lower than $30 billion. At the end of June there were 18,400 claimants. In cancer suits against DuPont , Takeda and Pfizer since 2012, claimants have ended up with awards of between roughly $170,000 and $270,000 each, suggesting a total cost to Bayer of between roughly $3 billion and $5 billion. The claimant count will no doubt grow, but investors need very aggressive assumptions indeed to get above a cost estimate of even $15 billion."

 

"There are other signs that Bayer stock has fallen too far. It trades on nine times expected earnings, compared with 21 times for Corteva Agriscience , the seed-and-pesticide maker spun out of DowDuPont this year, and 14 times for big U.S. pharma stocks. The deal Bayer announced Tuesday to sell its animal-health unit for $7.6 billion—at a much higher multiple of earnings than the wider company itself fetches—only makes its valuation look cheaper"

[glorysk87]

Mind posting the full article?

[UK]

https://www.bloomberg.com/news/features/2019-09-19/bayer-s-monsanto-purchase-looks-worse-with-each-roundup-verdict

 

"When a Bayer lawyer asked one juror what the panel needed as proof that the Monsanto product was safe, the juror replied, “I wanted you to get up and drink it.”

 

“The first thing I do when I meet a stranger is, I tell him that I’m a lawyer, that I sue Monsanto, because people immediately go, ‘Good man, let me buy you a drink.’ ” He adds: “Everywhere I go, it’s amazing, everyone f---ing hates these guys. It’s great.”

 

"Millions of farmers still rely on Roundup, however, and argue that nonglyphosate products would potentially be worse for the environment. When reporters recently toured Bayer’s crop science division, employees backed Baumann, saying the Roundup litigation isn’t only misplaced, it’s also a distraction from the company’s mission to develop much-needed agricultural technology to produce more food on less land.  “The challenge just keeps getting bigger and bigger and bigger,” said Condon, the division chief. Baumann remains as placid and soft-spoken as ever. In early September he traveled to Frankfurt to attend meetings. Seated in the courtyard of the five-star Villa Kennedy hotel, he looked tan and relaxed. Eighty percent of his personal wealth is invested in Bayer, but he said he wasn’t losing sleep over the Roundup litigation"

[Spekulatius]

It looks like Bayer can settle most of the Roundup lawsuits for ~$10.9B, which isn’t an existential problem. The sale of their animal health division to Elanco will yield $5.17B plus Elanco shares worth ~$1.5B that will be sold next year. The EV is ~7x and debt is <3x which also seems manageable. Just eyeballing it, it trades at the same valuation than it did in 2015/2016 but their business is arguably better, since they sold/spun off commodity business like polymers. What is left is Pharma , AG chemicals/seeds and consumer health.

 

Bayers Management isn’t great, but this should relate Unless they do something incredibly dumb again.

 

Disclosure: no position yet.

https://media.bayer.com/baynews/baynews.nsf/id/Bayer-announces-agreements-to-resolve-major-legacy-Monsanto-litigation?Open&parent=news-overview-category-search-en&ccm=020

[reader]

Bayer had just  completed the sale of its Animal Health business unit to Elanco on August 3rd for $5.17B plus 72.9M Elanco shares($24.44 last close) for a moving total(there's a lockup on Elanco's shares) of $6.95B.

 

I'm long Bayer. to have this level of volatility in megacap pharma-AG is a gift.

I boosted my position by 50% at $13.3 in the COVID panic, naively I expected Bayer to outperform in that environment, like its Pharma peers and inline for the sector in times of crisis but I was thankful to be wrong and buy on sale.

 

This stock is just hated but the underlying business is solid(their Pharma R&D churns out PH3/approvals in major fields(cancer, cardiovascular) and with them wrapping up the bulk of their litigation issues the sentiment would shift.

I'm comfortable holding it through their legal woes as they seem manageable relative to their CF/EV/cash etc.

 

 

 

https://www.investor.bayer.de/en/nc/news/investor-news/investor-news/bayer-completes-the-sale-of-its-animal-health-business-unit-to-elanco/

 

 

 

It looks like Bayer can settle most of the Roundup lawsuits for ~$10.9B, which isn’t an existential problem. The sale of their animal health division to Elanco will yield $5.17B plus Elanco shares worth ~$1.5B that will be sold next year. The EV is ~7x and debt is <3x which also seems manageable. Just eyeballing it, it trades at the same valuation than it did in 2015/2016 but their business is arguably better, since they sold/spun off commodity business like polymers. What is left is Pharma , AG chemicals/seeds and consumer health.

 

Bayers Management isn’t great, but this should relate Unless they do something incredibly dumb again.

 

Disclosure: no position yet.

https://media.bayer.com/baynews/baynews.nsf/id/Bayer-announces-agreements-to-resolve-major-legacy-Monsanto-litigation?Open&parent=news-overview-category-search-en&ccm=020

[samthefirefly]

Any update? Read this DD by asymetrical bets (https://asymmetricbets.com/bayer-ag-buy/). Some interesting quotes:

 

"Bayer trades at a meaningful discount to its historical valuation and to the sum of its parts. Bayer’s valuation should recover through the de-risking of the glysophate liability and the recovery of its other business segments. I believe Bayer’s stock is worth EUR 101 versus a price of EUR 58 today. Bayer’s current dividend yield is almost 5% and the dividend is well-covered by FCF"

 

"Sophisticated scientists and regulatory agencies continue to stand by RoundUp – the U.S. and E.U. agencies have both recently reaffirmed their support for glysophate. However, there are a few alternative studies that claim a possible link to cancer, most notably an IARC study from 2015. The IARC rates glysophate as category 2A “probably carcinogenic,” which is the same rating as red meat, very hot beverages, and Cisplatin (a chemotherapy drug). Very hot beverages and chemotherapy drugs, folks."

 

"Even so, if we assume that glysophate-related EBITDA is EUR 3-5bn, Bayer is currently trading at 9-11x ex-glysophate EBITDA, versus its historical average of 9x and peer average of 9.5x. Essentially, the most adverse event is already priced in, with any incremental good news (or incrementally less-bad news) providing upside to the current price. This is the very definition of an asymmetric bet – all of the bad news is already priced in!"

 

I've also attached the latest morningstar report (please inform me if this is not allowed and I will remove it)

 

Overall, the company has clearly been negatively affected by the Monsanto acquisition (in terms of profitability and PR). But that price looks too cheap given their current situation and the overall strenght of their business. I have a hard time seeing a world in which investing at these prices loses you money over the next couple of years.

2039-0P000000QF_20201116_RT-1.pdf

[Spekulatius]

^ I concur with above and have been adding to my position recently. It seems undervalued relative Cortiva and any sum of part analysis with their pharma business. They have made good progress  settling their Roundup liabilities and the monetization of their Animal Health Business has greatly helped.

 

I am not a fan of their management  p but this seems clearly mispriced.

[samthefirefly]

Leaning on starting a position. Concerned about management compensation: am I reading this wrong, or was management paid 26 million euro in aggregate compensation last year? Over 6 million euro in fixed compensation, not used to seeing management pay over 3-4 million so it is a slight concern

 

 

*trying to include an image, not sure it'll work

[ukvalueinvestment]

It's a blue chip global company so you would expect high pay.  Is 6 million bad, but 4 million good?  Not sure about that?  I think the question with Bayer is about governance generally, whether it can generate value or whether it is too big and not run for the shareholder.  Do we trust management to allocate our capital prudently for next ten years?

[samthefirefly]

Considering the importance of trusting a management team, it's just so difficult to truly assess their quality as an outside small investor. This is one of those cases where I wish I could talk to management or at least have a concrete idea of their values, character, and perspective.

 

In any case, it reminds me of a Pat Dorsey discussion on management

 

"Excellent management can make the difference between a mediocre business and an outstanding one, and poor management can run even a great business into the ground.

 

Look a the raw level of cash compensation to see if it's reasonable. There's not necessarily a strict limit here, though I personally think an $8 million cash bonus is silly no matter how well the company has done. In any case, use your own judgement - if the amount that executives earn makes you cringe, it's probably too much. In general, the larger the firm and the better its financial performance, the more an executive should be paid. But some executives think they have a license to print money just because they manage a huge company, no matter how poor a job they're doing, which is why you need to determine whether their pay is tied to the firm's operational performance."

 

I do agree with you though, in Bayer's case the most pressing issue (specially considering the current valuation) is whether the company it can generate value. Past seems to indicate they can (attaching picture of the average past return), and the economic moat is there.

 

From an analyst report:

 

"The company has a diverse portfolio of patent-protected drugs and a growing number of biologic drugs. The company also has a strong global salesforce that can attract smaller drug firms to partner with Bayer for commercialization efforts, which augment Bayer's internal drug-development efforts.

 

The company's consumer health business benefits from a narrow economic moat, largely because of its strong brand power. Consumers continue to pay a premium for Aspirin and Aleve even though strong generic competition has existed for many years

 

The company also has a wide economic moat in its crop science business. While some of the crop science business is a commodity business with few barriers to entry, other areas, including biosciences, maintain high barriers to entry--rigorous research and development efforts required to participate in this market combined with strong patent protection keep the majority of competitors at bay and support strong pricing power"

 

Ultimately management might not be as relevant given the current price. Ton of upside, very limited downside (in my opinion). Will likely start a position on Monday

[scorpioncapital]

"Excellent management can make the difference between a mediocre business and an outstanding one, and poor management can run even a great business into the ground"

 

pretty much the exact opposite of what Buffet says.

[petec]

"Excellent management can make the difference between a mediocre business and an outstanding one, and poor management can run even a great business into the ground"

 

pretty much the exact opposite of what Buffet says.

 

I don’t think Buffett disagrees with this at all. Look how carefully he chooses and lauds his managers.

 

What he says is that great businesses can survive awful managers in a way that poor ones can’t - in other words, they can recover from being run into the ground.

 

(Admittedly this might hinge on exactly how we define “run into the ground”!)

[elliott]

Looking at morningstar data, Bayer has usually had an equity ratio of 36%. After the litigation hit, this seems to have dropped to 26%. Considering Bayer has 126B in assets, it would need to retain 12B euros for the equity ratio to recover to the historical average.

I doubt management will target that 36% level anytime soon, but I also think that sooner or later they must reduce the leverage somewhat, and that it may possibly have an impact on dividends.

 

 

 

[DooDiligence]

I like the way they use EBITDA before special charges as a measure of performance to calculate compensation  ???

 

They bought a business mired in litigation and want to be compensated as if the settlements don't exist? I smell more financial engineering which may or may not extend to capital allocation.

 

I think they'd have been significantly better off had they not bought Monsanto. Now they're selling off profitable businesses to pay for the mistake.

 

That said, they're getting paid to run a great set of businesses (ex-litigation settlement) and the fact that I think they're a bunch of douches means this will go to the moon next year.

 

edit: If they'd have installed a science guy in the top spot, post deal, I'd have more confidence but...

[samthefirefly]

Less confident since my last post. Bayer definitely owns great businesses, has a moat, generates tons of free cash flow, and is fundamentally undervalued. That said, it seems like capital will be allocated in ways that do not directly benefit shareholders for the next couple of years:

 

- At least 10B to settle the Roundup legal issues

- As elliott pointed out, they have to reduce leverage

 

Did some more digging into their statements, and it appears that their pension plan is underfunded by almost 8 billion (have attached pictures) so even less capital for shareholders to benefit from.

 

 

Much less comfortable starting a position at the moment

[Gregmal]

^^^You dont think clearing those issues benefits shareholders? $10B to settle lawsuits probably creates more value for shareholders than a similar sized special dividend or repurchase. This currently trades like shit because of all the shit. Clean it up and you'll get a better multiple.

 

 

No position, but it is on the radar.

[samthefirefly]

^^^You dont think clearing those issues benefits shareholders? $10B to settle lawsuits probably creates more value for shareholders than a similar sized special dividend or repurchase. This currently trades like shit because of all the shit. Clean it up and you'll get a better multiple.

 

 

No position, but it is on the radar.

 

Clearing the issues does benefit shareholders but in an indirect/inefficient manner. If my wife gives me super gonorrhea and offers to pay for all my treatments, I am benefitting from having my treatments paid off. But I would have preferred to benefit from not contracting the disease and instead get gifts/vacations.

 

Stupid analogy aside, you're definitely right though. Beneath the legal issues, leverage, and underfunded plan is a juggernaut of a company with a moat and diversified/dominant business.

 

I guess some of my concerns are:

- How long will it take for Bayer to clear these issues and for the market to recognize it?

- A return to normality implies that no further hiccups affect the company (bad acquisitions, legal issues, etc). Still need to do more digging to understand the firm's drug pipeline, sources of future growth, and figure out what's the deal with management

- Can I find investments in the meantime that will produce better results?

 

Overall, my feeling is still that chances are you make a good return over the next couple of years, but need more time before I pull the trigger.

[samthefirefly]

Was looking at the company's financials over the past 10 years and having some issues I'm hoping someone can help me clarify.

 

I'm seeing a mid 20% decline in revenues from 2015 (46,085) into 2016 (34,943). When I go to Bayer's website this is what I'm getting:

 

2016 annual report states that the year's revenue was 46,769 (which would imply a +1.5% from 2015)

2017 report shows that 2016's revenue was 34,943 (-24% from 2015)

 

I can't find any explanation for it online as it doesn't seem Bayer sold any businesses during that year. I'm sure I'm missing something (and Bayer is not helping by being so vague) so hopefully one of you gems knows what's up

[elliott]

Was looking at the company's financials over the past 10 years and having some issues I'm hoping someone can help me clarify.

 

I'm seeing a mid 20% decline in revenues from 2015 (46,085) into 2016 (34,943). When I go to Bayer's website this is what I'm getting:

 

2016 annual report states that the year's revenue was 46,769 (which would imply a +1.5% from 2015)

2017 report shows that 2016's revenue was 34,943 (-24% from 2015)

 

I can't find any explanation for it online as it doesn't seem Bayer sold any businesses during that year. I'm sure I'm missing something (and Bayer is not helping by being so vague) so hopefully one of you gems knows what's up

 

I think it probably is because of Covestro. Covestro was IPOed in October 2015, and the sale of all the shares Bayer held took some time.

 

Covestro is no longer a reportable segment and is presented as a discontinued opera-

tion until the date of its deconsolidation. The financial information for the periods preceding the

deconsolidation, including the comparative prior-year figures, has been restated accordingly.

That is from 2017.

 

 

[samthefirefly]

Was looking at the company's financials over the past 10 years and having some issues I'm hoping someone can help me clarify.

 

I'm seeing a mid 20% decline in revenues from 2015 (46,085) into 2016 (34,943). When I go to Bayer's website this is what I'm getting:

 

2016 annual report states that the year's revenue was 46,769 (which would imply a +1.5% from 2015)

2017 report shows that 2016's revenue was 34,943 (-24% from 2015)

 

I can't find any explanation for it online as it doesn't seem Bayer sold any businesses during that year. I'm sure I'm missing something (and Bayer is not helping by being so vague) so hopefully one of you gems knows what's up

 

I think it probably is because of Covestro. Covestro was IPOed in October 2015, and the sale of all the shares Bayer held took some time.

 

Covestro is no longer a reportable segment and is presented as a discontinued opera-

tion until the date of its deconsolidation. The financial information for the periods preceding the

deconsolidation, including the comparative prior-year figures, has been restated accordingly.

That is from 2017.

 

Yup, that's what it is. Thank you so much!

[Aurel]

Found a quite good write-up on bayer in my opinion. So i thought i share it here:

 

https://requantify.substack.com/p/bayer-ag

[Spekulatius]

10 hours ago, Aurel said:

Found a quite good write-up on bayer in my opinion. So i thought i share it here:

 

https://requantify.substack.com/p/bayer-ag

Yes, that’s a pretty good writeup. I like the discussion of the Pharma business in particular. I think what is missing here though is that management is subpar, both in terms of capital allocation and shareholder communication and perhaps even operations. For that reason, I do consider some discount as appropriate.

 

That said, I own some shares and bought more a few month ago when the shares took just another one of these dumps. I think it is still a bit undervalued, but a better management could unlock a lot of value from the three above average business that Bayer has.

 

One thing that is not knows is that Bayer owns within it’s crop science business a precision agriculture software business (Climate) that’s seems to be the leader in their field and benefit from Bayers scale and their seed and crop science business scale:

 https://www.climate.com
 

I don’t think the current valuations assigns any value to this business (and others).