Bayer: activist could revive fortunes of chemical group

Does Bayer’s C-suite have sufficient chemistry with its shareholders? The recent addition of two activist investors suggests maybe not. Jeff Ubben at Inclusive Capital Partners thinks the current management team is too tight-knit and wants Bayer to hire a new chief executive from outside. London based Bluebell wants even more — a break up of the company.

More than six years on from Bayer’s poorly timed decision to acquire America’s Monsanto, the latter’s litigation woes about weedkiller Roundup still weigh on Bayer’s share price. Chief executive Werner Baumann must shoulder the blame for buying the seed maker in September 2016. The fact that the shares trade at a historically low 7 times forward earnings, suggests the activists have a point. Bayer has become a value stock.

Yet, there are signs of improving financial health. A commodity boom and increased pricing power have lifted profits. Last year’s full-year operating profit should hit a record €8.8bn. Rising free cash flow is slowly eroding leverage. Net debt as a multiple of ebitda should fall to two times by 2024 from a multiple of almost three in 2021.

Even better, Bayer’s pharma unit has more than doubled its peak sales targets to over €12bn. That was driven by favourable potential for its cardiovascular drug Kerendia plus new forecasts for its thrombosis treatment asundexian. Pharma in the past has accounted for about 40 per cent of group revenues.

Ubben does not deny that business has improved. But he believes that the fertiliser to pharma chemicals group could do more to isolate the liability to Roundup. That includes splitting off the litigation liabilities into a separate company. Johnson & Johnson used this so-called “Texas two-step” to ringfence cancer litigation linked to its baby powder product.

Ubben’s fund has invested €400mn into Bayer to get management’s attention. Support for change at the top should be the very least that fellow shareholders latch on to.