Bayer’s CEO weighs breakup in U-turn for German conglomerate

BAYER’s new chief executive officer said he’s weighing a breakup of the pharma and agriculture conglomerate, a move that could undo much of the legacy of his predecessor, including the troubled acquisition of Monsanto.

Bill Anderson, who took over as CEO in June from Werner Baumann, said he may separate Bayer’s consumer health or crop science operations. Baumann rejected such a step, even after the US$63 billion takeover of Monsanto turned sour and activist investors demanded action.

“We are redesigning Bayer to focus only on what’s essential for our mission, and getting rid of everything else,” Anderson said as the company reported disappointing third-quarter earnings. That will likely impact the workforce as well as the company’s structure, he said.

The German company’s earnings plunged 31 per cent last quarter to 1.69 billion euros (S$2.45 billion) before interest, taxes, depreciation and amortisation, missing estimates and hurt by falling prices for glyphosate, the active ingredient in the weed killer Roundup. Bayer reiterated that sales and profit will likely fall this year and said it expects “a soft growth outlook and continued challenges” to profitability next year.

Bayer expects to generate zero free cash flow this year despite nearly 50 billion euros in revenue, something Anderson called “simply not acceptable”. The CEO pledged to remove multiple layers of management by the end of next year and elaborate on future plans for Bayer at an investor day in March.

“It is refreshing to hear Bill saying that ‘the status quo is not an option’,” said Marco Taricco, co-chief investment officer of Bluebell Capital Partners, an activist that’s built a stake in Bayer and is pushing for a breakup. “We maintain our strong view that the value creation opportunity by separating the three businesses, and running each of them more efficiently, is very significant.”

The stock fell about 0.8 per cent in Frankfurt trading. It has shed 20 per cent in the past 12 months.

Anderson joined as Bayer confronts a thicket of challenges on both the crop science and pharma fronts. His statements are the most tangible picture Bayer has ever offered about its openness for potentially breaking up the current business model. Anderson said he has considered, but then ruled out a simultaneous three-way split.

“As hoped, Bill Anderson is turning over every stone at Bayer,” said Markus Manns, portfolio manager at Union Investment, a shareholder. “Simplifying the group structure would be an important step in making the company more attractive on the capital market. Spinning off consumer health would be the easiest way to generate value.”

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Even as he pledged to act fast, Anderson acknowledged that it could take as long as five years to fully exit either Bayer’s crop science or consumer health businesses. One challenge on the crops front remains the expensive and ongoing litigation in the US over legacy Monsanto products such as Roundup and toxic PCBs, he said on a call with analysts.

One potential positive for investors: Bayer intends to honour its long-standing policy of paying out between 30 per cent and 40 per cent of its earnings per share as a dividend, chief financial officer Wolfgang Nickl told analysts.

“We have no free cash flow this year, but we have every intention to make that look much different next year despite a weaker top line and a weaker profitability,” he said.

Baumann survived repeated shareholder rebukes during his seven-year tenure as CEO before stepping down this year. A staunch defender of Bayer’s conglomerate approach, he spearheaded the acquisition of Monsanto, which saddled Bayer with debt and massive legal headaches related to Roundup. BLOOMBERG