Profit Decline

Monsanto merger is the booster shot Bayer needs

Gemeiner Hopfen, Humulus lupulus, common hop
I swear I already did this row. Source: Picture Alliance

It’s been an unexpectedly tough year for Bayer, maker of everything from aspirin and analgesics to industrial chemicals and polymers. That’s partly due to formidable regulatory hurdles the company faces in its proposed acquisition of US agrochemical company Monsanto, but also to internal difficulties – a little factory housecleaning, for instance.

As a result, the German pharmaceutical giant saw group profit drop 2.6 percent to €8.6 billion ($10.5 billion), with the normally dry-humored CEO, Werner Baumann, taking a more serious tone at this year’s earnings report meeting. “Things did not go the way we imagined at the beginning of the year,” he said.

Yet things stand to look up. The planned Monsanto merger, which comes with its own liabilities, could be just the boost the company needs after running into trouble at its home production facilities, and with the falling US dollar.

“Things did not go the way we imagined.”

Werner Baumann, CEO, Bayer

Unlike Bayer, Monsanto increased earnings before interest, taxes, depreciation and amortization by 12 percent in 2017 to the equivalent of €3.5 billion. Happily for Bayer, more of the same is expected in the years to come.

Although Bayer was forced to make numerous concessions, such as selling parts of its seed and crop protection businesses to German chemical rival BASF for €5.9 billion, selling its vegetable seed business for an estimated €1.5 billion, and making competitors privy to their  agricultural production software, all in order to placate the EU’s antitrust authorities, the divestments ended up helping the company. Bayer managed to reduce its overall debt for the year by two-thirds, meaning the capital increase needed to finance the Monsanto acquisition should be considerably less than the €17 billion originally anticipated.

01 p16 Bayer by the numbers-01

If the Monsanto acquisition costs approximately €51 billion as expected, including taking over debts, the company will still need debt financing and a capital increase worth close to €43 billion. Assuming that Monsanto and Bayer together achieve an EBITDA of more than €12 billion, the combined company could cope with €36 billion in debt, without jeopardizing its investment grade rating.

It also helps that Monsanto generates most of its business in the US, with Roundup weedkiller being the largest crop protection brand globally, and will benefit greatly from a US tax reform passed last year, which significantly reduce corporate taxes.

Bayer initially hoped the approval process for the Monsanto merger would be completed by the beginning of the year, but the European Union’s antitrust authorities have promised a result by April 8, with insiders saying the EU was set to give its approval for the deal.

It is still unclear how the US Justice Department will react after seeing pushback against the deal from politicians in farm states, but a green light from EU authorities is seen as the crucial breakthrough. Assuming a smooth run to the finish line, the process of merging looks to take place in April or May. And it comes just in time.

01 p16 Bayer share price-01

Unrelated to the Monsanto merger is Bayer’s major – and expensive – problem with the US Food and Drug Administration. The regulatory agency recently declared that the company’s pharmaceutical plant in Leverkusen, Bayer’s hometown, is unsanitary, an embarrassing rebuke for one of the world’s leading producers of medicine. With sales of €16.8 billion last year, Bayer’s pharmaceuticals division continued to be the company’s most important growth engine, seeing a currency-adjusted 4.3 percent increase in sales. But stopping production and cleaning the plant will cost around €300 million, Bayer said.

In addition, Bayer’s Crop Science division encountered its own difficulties last year in Brazil, where there were too many agents selling its products. The company took a writedown of another €300 million on its Brazilian business. Even the home products division, which sells such households names as Coppertone sunscreen and Dr. Scholl’s foot care, couldn’t keep up with competitors like Johnson & Johnson, with sales declining by 1.7 percent.

These developments make it clear that Bayer is counting on Monsanto to give a boost to its earnings, especially after the company’s share price dropped nearly 4 percent after its numbers were released.

Bert-Friedrich Fröndhoff leads a team of reporters who cover the chemicals, healthcare and services industries. Siegfried Hofmann is Handelsblatt’s chemical and pharmaceutical industries correspondent. This article was adapted into English by Charles Wallace and Christine Coester, editors for Handelsblatt Global. To contact the authors: froendhoff@handelsblatt.com and hofmann@handelsblatt.com.

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