Bayer takes small steps to placate shareholders

LONDON: Bayer boss Werner Baumann has bought some breathing space with angry shareholders by doing the obvious. Facing 13,400 claims from users of Roundup, the weed killer acquired with the purchase of Monsanto, the 56 billion euro German group has hired an outside expert on class-action lawsuits, a move that could lead to a swift settlement. But with Roundup-related risks becoming clearer, the hard work may just be starting.

Baumann had to do something. Since August last year, when US juries started linking Roundup to cancer, Bayer shares have nearly halved as more and more plaintiffs were awarded vast payouts. Furious shareholders gave an unprecedented vote of disapproval in April, by refusing to ratify management's actions. And pushy activist Elliott Advisors has been quietly building a stake in the drugs to seeds maker.

Bayer insists that Roundup is safe and that science is on its side. But with each plaintiff receiving potential payouts as high as $1 billion, fighting each case could have taken years, depressing its share price. The decision to appoint top US class-action expert John H. Beisner suggests a broader settlement could come sooner.

Most analysts expect a settlement will be less than $10 billion, a fraction of the 40 billion euros ($45 billion) wiped off Bayer's market value since August. In 2007 Beisner helped US drugs firm Merck negotiate a $4.9 billion settlement with 27,000 plaintiffs over the Vioxx anti-inflammatory treatment - equivalent to around $180,000 a head. Small wonder his hiring added more than 3.5 billion euros to Bayer's market value.

The shares should continue to rise if a settlement nears. But Bayer's stock was depressed even before the Roundup crisis kicked off. Using peer multiples, and baking in a $5 billion Roundup settlement, Bayer should be worth around 110 euros a share, according to a Breakingviews sum-of-the-parts calculation, compared with its current 60 euros. That lowly valuation reflects deeper problems: Bayer's pharmaceutical business faces patent expiries, while revenue at its consumer health division fell 7% last year.

The cheap price, and lack of obvious synergies between Bayer's different drugs, consumer health and crop science divisions, make a good case for more disposals, or even a breakup. Given its potential size, Bayer's legal bill should clearly be Baumann's number one priority, but It may turn out to one of the easier weeds he needs to pull out.

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CONTEXT NEWS

- German aspirin-to-weed killer group Bayer said on June 26 it had hired an external lawyer and set up a committee on its supervisory board to help resolve a multibillion-dollar legal dispute over its glyphosate-based weed killer Roundup.

- It said it has appointed John H. Beisner from Skadden, Arps, Slate, Meagher & Flom to look at its legal defence against 13,400 plaintiffs who allege they got cancer from Roundup, which Bayer acquired via its $63 billion takeover of Monsanto last year.

- The new board committee will comprise eight existing board members and be chaired by Werner Wenning, the current supervisory board chairman.

- Elliott Advisors revealed on June 26 that it controlled Bayer shares worth 1.1 billion euros, equivalent to around 2% of the company, based on the June 26 closing price. The appointments mark a "step change" in Bayer's approach to the glyphosate litigation, Elliott said in a statement. Elliott Advisors is a UK affiliate of Elliott Management.

- Bayer shares jumped 6% to 59.4 euros by 0739 GMT on June 27, their highest in more than six weeks. The stock is still down 36% since August when a US jury first linked Roundup to cancer.