Bayer Split

Playing with Chemicals

Marijn Dekkers agm dpa
There's much at stake for CEO Marijn Dekkers with the corporate split.
  • Why it matters

    Why it matters

    The valuation and separation of Bayer’s plastics operations will be a key driver of the company’s share price in the next twelve months.

  • Facts

    Facts

    • Bayer, Germany’s largest drugs maker, said last year it would float its chemicals division, but has still not set a specific date.
    • The company had sales of €42 billion last year, one quarter of which come from the material science division.
    • The plastics unit could fetch as much as €12 billion, but it will depend on how much debt and pension obligations the new firm has to shoulder.
  • Audio

    Audio

  • Pdf

The countdown is on, that’s been very clear for everyone entering the Bayer lobby in Leverkusen, North Rhine-Westphalia. On LED displays, the pharmaceutical giant first announced that the structure for the soon-to-be-spun off chemical division is set. A few days later, it said that 1,000 employees will be with the newly created company.

And soon, the chemical firm’s name will be announced there as well.

On Wednesday, Bayer shareholders discussed the corporate split at the annual general meeting. The Bayer chief executive, Marijn Dekkers, said the chemicals divison, called MaterialScience, would be listed by mid-2016 at the latest. Whether it would be sold through an initial public offering or an administrative split of Bayer shares, where an investor receives shares in two separate companies, was still up for discussion.

The breaking up of drugs and chemicals maker Hoechst was supposed to increase the value for shareholders, but ended in disaster.

The legal and operational separation of MaterialScience, which makes plastics and other chemical products, from Bayer’s healthcare and insecticides businesses should be completed by September 1, Mr. Dekkers said.

The split is a turning point for Germany’s most valuable company, which is worth more than €110 billion, or $120 billion, on the stock exchange. The chemicals unit started out 151 years ago with the manufacturing of tar dyes in Wuppertal-Barmen and formed the basis of the company.

With the separation, Mr. Dekkers, CEO since 2010, is shedding about a quarter of the company’s annual sales of €42 billion. The idea is to focus on drugs and insecticides in the future. The chemical division will have to stand on its own feet, as the third largest player in Germany, tailing BASF and Evonik.

For Mr. Dekkers, it’s the peak of his career. The 57-year-old Dutchman, who will leave the company at the end of 2016, might oversee a floatation worth more than €10 billion. If so, it would be the biggest initial public offering since the privatization of telecoms giant Deutsche Telekom in the 1990s.

“We want to create two global top players in their respective fields,” Mr. Dekkers has previously said about the castoff subsidiary. “Bayer MaterialScience is both leading in the market and in technology.”

Of course, he doesn’t talk about the risks and side effects that come with the transformation into a pharmaceuticals firm. And it’s not all quite as shiny at the chemicals division as the boss makes it sound. Whether the flotation will be successful is no sure thing. The company-to-be is weighed down by high costs, excess capacity and price erosion in the market.

 

Bayer 2014 Results-01

Investors and employees haven’t had the best experiences with shedding chemical units in the past. The breaking up of Frankfurt-based drugs and chemicals maker Hoechst about 15 years ago, pushed by then-CEO Jürgen Dormann, was supposed to increase the value for shareholders but ended in disaster.

The pharmaceuticals division was first run down by its French partner Rhône-Poulenc and finally ended up in the fold of drug giant Sanofi, where today it leads a marginalized existence. The chemicals wing was sold mostly abroad, layoffs and share-price drops ensued.

Düsseldorf-based detergent maker Henkel’s splitting with its chemical division in 2001 is considered another dark chapter in the industry’s history. The new owners, financial investors Permira and Goldman Sachs, starved the newly created corporation called Cognis with high debt and special dividends before selling it to BASF in 2010.

Synthetic rubber and chemicals maker Lanxess used to be a positive example, for a while at least. Today, the DAX-listed company, which was part of the Bayer empire until 10 years ago, is in dire need of a restructuring because former CEO Axel Heitmann has focused the firm too narrowly on rubber production for tire manufacturers.

Bayer’s net borrowing has risen from €9 billion to €21 billion after the purchase of Merck & Co over-the-counter drugs division.

Mr. Dekkers and his predecessor Werner Wenning have shaped Bayer more and more into a drugs maker. It bought Berlin-based birth control specialist Schering in 2006 for €17 billion. Last year, it acquired Norwegian pharmaceutical firm Agenta for €2 billion and the over-the-drugs operations of U.S.-based Merck & Co for 14.2 billion.

Chemicals are not part of this plan. The pill business is more profitable than chemical plastics.

The cost for developing and marketing new medication is rising too. Indebtedness has grown with the pricey acquisitions, and health and crops have priority within the corporation, so there’s not enough capital left for investments in plastics. Mr. Dekkers says the division can use its independence to act faster, better and more flexibly in the market.

Shareholders are skeptical. “Bayer MaterialScience has recently been the problem child at Bayer, the IPO is not a sure-fire success,” said Marc Tüngler of the German investors’ association DSW.

The chemicals unit turned over more than €11 billion in 2014, making a profit of €1.1 billion before taxes. What sounds respectable at first is actually only a 10-percent profit margin. The pharmaceuticals wing achieves 27.5 percent, pesticides about 25 percent.

The reason for the comparatively weak margin is partly rooted in the product range. Bayer’s chemicals department is considered one of the biggest and best makers of polyurethane, used for rigid and flexible foams. The business with commodities for scratch-proof paints is going well too.

But other important core products, like polycarbonate plastics, seem to be past their prime. New competitors from Asia cause excess capacities and erode prices. For years, Bayer used to make good money with CDs made from polycarbonates. In times of MP3 players and online streaming, however, fewer and fewer people are buying compact discs.

Bayer material science auto seats PR
Looks fancy, but is less profitable than drugs: Bayer Material Science. Source: PR

 

Bayer’s hope that light-weight synthetic materials will soon replace heavy glass in cars has not materialized yet. “So far, headlights might be made of polycarbonate, but big windscreens are not,” said an industry insider.

The largest chunk of the Bayer chemicals division is made up of commodities – exchangeable mass products where it’s all about the price. Bayer, however, often produces at high costs, particularly in Germany.

There’s not much hope for improvement. The association of the chemical industry, headed by Bayer chief Mr. Dekkers, expects sales and prices to drop in 2015. Prices for energy and raw materials are lower in the United States, and new competitors are pushing into the market from Asia.

The biggest question mark is still the financial strength of the future Bayer chemicals company. “Much depends on how much debt and pension obligations Bayer will load on the new firm,” said Joachim Kregel from investor protection association SdK. “That will show how much the new company can invest.”

There’s a real temptation to burden the newly created corporate with lots of debt. Bayer’s net borrowing has risen from €9 billion to €21 billion after the purchase of Merck’s over-the-counter drugs division. A high debt level would mean a lower price at the stock exchange.

Mr. Tüngler of German investors’ association DSW said it “would be very remarkable” if the floatation would actually bring in up to €12 billion.

But maybe the chemicals division will never make its debut on the exchange after all. An offer from a competitor or financial investor could still prevent the IPO from taking place.

“If we were to get an overall attractive offer, we would have to look at it for the good of the company. We’re currently considering this option unlikely, however, and are completely focused on going public,” said Mr. Dekkers.

020 Bayer - Neu 2015-05-28-01

State-owned Saudi-Arabian oil giant Aramco and its Chinese rivals Sinochem or ChemChina might very well be interested in Bayer MaterialScience, insiders say. All three companies are investing in further processing their oil and gas reserves. Bayer’s good positioning and technology in the field of polyurethanes, which are made from crude oil, might be interesting for the oil producers. The three firms declined to comment on the rumors.

Bayer did look into the option of selling the MaterialScience wing before preparing the IPO. But talks with Essen-based Evonik failed, supposedly because of different ideas on the price.

The chemicals division would also be a good fit for Lanxess; after all, both companies were united in the Bayer fold until 10 years ago. Lanxess could use the Bayer plastics to reduce its dependence on synthetic rubber. Lanxess, however, doesn’t have the money for an acquisition.

That’s why sources in the industry have also been talking about a scenario where big financial investors get together to buy both firms and merge them into a new chemicals giant. That would cost an amount in the low two-digit billions, but “at private equity firms billions are actually waiting to be invested,” a person familiar with the sector said.

Financial investors would not be able to run the company as they please. After all, Mr. Dekkers has promised to maintain all 35,000 jobs in Germany, including 6,500 in chemicals, until the end of 2020 to win the support of the workers’ representatives in the non-executive supervisory board, which has to approve all major strategic decisions.

“The agreement means protection from joint ventures and acquisitions for employees,” said Frank Löllgen from the North Rhine-Westphalian division of the chemical industry union IG BCE.

That’s good for workers, but for potential buyers and future shareholders, it’s rather unpleasant.

 

This article originally appeared in WirtschaftsWoche. To contact the author: juergen.salz@wiwo.de

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!