Capital Markets

Bayer Planning Giant Bond Issue

  • Why it matters

    Why it matters

    Bayer has just presented a solid set of third quarter results but there remain problems in several areas of its business, and regulators are yet to sign off on the Monsanto deal.

  • Facts

    Facts

    • Bayer plans to issue a mandatory convertible bond worth €5 billion in the coming weeks to prepare for the Monsanto takeover, financial sources told Handelsblatt.
    • The yield is expected to be between 4 and 5 percent.
    • The company plans to raise a quarter of the €59 billion ($64.3 billion) purchase price for Monsanto by issuing new shares, with the remainder coming from bond issues.
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    Audio

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Schering und Bayer vor Zusammenschluss
Bayer is raising funds ahead of its giant takeover of U.S. seed producer Monsanto. Source: DPA

German drugs group Bayer is preparing  to issue a mandatory convertible bond totalling €5 billion ($5.5 billion) with a duration of 3 to 5 years, Handelsblatt has learned.

The money will help fund the takeover of U.S. seeds giant Monsanto. Anti-trust authorities in the U.S. and European Union will take around a year to approve the deal, but Bayer wants to take advantage of favorable market conditions to raise funds now, when demand for new bonds is high.

Despite current rock-bottom interest rates, financial sources expect Bayer to offer yields of between 4 and 5 percent. Mandatory convertible bonds offer higher yields because they are equivalent to an equity capital loan.

Bayer Chief Financial Officer Johannes Dietsch said on Wednesday that the company may bring certain capital moves forward.

He noted that there was an argument “that it could make sense from a rating point of view to do the equity capital portions sooner to gain rating security before the bonds come on to the market.”

Earnings are expected to decline in Bayer’s agricultural division and to stagnate in the consumer health unit.

The bond could improve Bayer’s credit rating because rating agencies categorize it as a form of equity capital.

Bankers said it would be the biggest bond issue of its kind. If the cartel authorities end up blocking the takeover, Bayer may do a share buyback to reduce the number of its shares in circulation.

Bayer plans to raise around a quarter of the €59 billion purchase price for Monsanto by issuing new shares, with the remainder due to come from various types of bond issues.

The deal reached in September after four months of talks is the biggest ever German takeover of a foreign company and is aimed at turning Bayer into the world’s biggest agrochemicals company.

Bayer presented a strong set of third-quarter results Wednesday and slightly raised its forecast for 2016, predicting an increase of between 5 and 10 percent for both operating profit and adjusted earnings per share.

But the momentum stems mainly from the prescription drugs division and the spun-off plastics subsidiary Covestro. By contrast, earnings are expected to decline in Bayer’s agricultural division and to stagnate in the consumer health unit.

The poor performance of consumer health seems particularly disappointing given Bayer’s ambitions in this field. It wants the prescription-free drugs and health products which generate annual revenue of some €6 billion to become the third pillar of the new Bayer group, alongside drugs and agrochemicals.

Adjusted for currency fluctuations, revenue from consumer health grew 3.6 percent in the third quarter which isn’t that bad by comparison with Bayer’s peers: while British competitor Glaxo-Smithkline chalked up 5 percent growth, Bayer outperformed both Reckitt Benckiser and Johnson & Johnson.

But Bayer’s management is unlikely to be satisfied. The group strengthened its over-the-counter drugs business with a major acquisition, purchasing Merck & Co.’s OTC division for €11 billion and predicting €300 million in distribution synergies in the form of added revenue generated by coordinated distribution.

So far there’s not much sign of those benefits. Top products made by the former Merck division such as the Claritin allergy medicine or the Coppertone sunscreen products all sustained declines in sales in the first nine months.

The results so far and forecasts show that the division has been growing by just 2.5 percent per year compared with the combined Bayer and Merck OTC sales achieved in 2013, their last year apart before the takeover. And that’s despite the dollar appreciating by around a fifth in that period and the market having grown by around 4 to 5 percent per year.

Bayer Vorstandsvorsitzender Werner Baumann
Bayer CEO Werner Baumann has been disappointed with his firm's purchase of Merck & Co.'s OTC unit: Source: DPA

Bayer Chief Executive Werner Baumann couldn’t disguise his mild disappointment about the acquisition during an analysts’ conference in September when he said the revenues of the Merck division were $100 million lower than initially assumed when it was acquired in 2014.

“The product development turned out to be not nearly as good as was portrayed during the due diligence,” he said. That means Merck’s managers appear to have cast the product pipeline in a rosier light than they really were: something Bayer wasn’t able to detect during its brief check of Merck’s books.

Merck appears not to have invested much in important brands such as Coppertone and foot care brand Dr. Scholl’s. Now Bayer has to spend millions on marketing, distribution and development to strengthen these two important product lines.

Mr. Baumann is standing by his medium-term goals for consumer health of 4 to 5 percent annual growth by 2018, with the margin of profit before interest, taxes, depreciation and amortisation rising by 1 percentage point to 25 percent of revenues by then. In the first 9 months of 2016 that margin fell slightly to 23.1 percent.

The weakness of consumer health is being more than offset by the strength of Bayer’s far larger prescription drugs division where new medicines such as blood-thinning drug Xarelto and eye medicine Eylea continue to achieve strong increases in the third quarter.

The drugs division achieved revenue growth of 7.6 percent in the quarter with adjusted operating profit up 13 percent to €1.4 billion. That enabled Bayer to slightly beat analysts’ expectations. Its third-quarter adjusted operating profits rose 6 percent to €2.68 billion while revenue rose by just over 2 percent to €11.3 billion.

But it’s not all plain sailing in prescription drugs either because Bayer needs to generate enough new products in the medium term to secure its sales growth, and it faces legal risks in the U.S. where the number of lawsuits related to alleged side effects of Xarelto has increased to 13,800. There are a further 2,500 lawsuits related to the Mirena contraceptive device and 3,000 women have filed suits about the Essure birth control implant.

Bayer bought Essure with its $1.1 billion takeover of Conceptus and wrote off €231 million of the firm’s value in the first quarter.

 

Robert Landgraf is Handelsblatt’s chief correspondent for the financial markets. Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Bert-Friedrich Fröndhoff leads a team of reporters which covers the chemicals, healthcare and services industries at Handelsblatt. To contact the authors: landgraf@handelsblatt.com, koehler@handelsblatt.com and froendhoff@handelsblatt.com

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