Talks about a deal do appear constructive, based on the tone of limited statements made by the legal mediator Ken Feinberg. Bayer’s lawyers have in some discussions proposed the firm pays $8 billion to settle existing suits and sets aside $2 billion for future claims, Bloomberg News reported Thursday. That was well received by the market, which pushed up Bayer stock as much as 4%. The $10 billion total is consistent with the cost that analysts have put on a settlement.
What’s striking about Bayer is that despite its recent rally the stock still trades at a substantial discount to peers, and removing this would be worth much more than the settlement costs being discussed. The company trades at 9 times expected Ebitda. Its pharmaceutical peers command valuations of 11.2 to 17.5 times. Just getting to a valuation matching its cheapest counterparts would add about 20 billion euros of market value, after deducting the estimated cost of ending litigation. A re-rating toward the average of its peer group would see Bayer’s market value rise even more substantially.
Investors are right to retain a degree of caution amid the evidence of progress. What Bayer’s lawyers put forward in talks is only a piece of the jigsaw. The number for a final cap on the cost of the glyphosate litigation remains unknown. Bayer has suggested it’s willing to fight if an acceptable figure cannot be agreed. Citing studies, the company says glyphosate is safe when used as directed. There remains a real possibility that the saga endures for longer than investors believe.
The other difficult question is whether Bayer deserves a valuation more generous than that commanded by its cheapest peers — such as GlaxoSmithKline Plc, Sanofi and Roche Holding AG. The same management is in place that led Bayer into this mess via an overpriced $66 billion acquisition of U.S. seeds group Monsanto Co. (the owner of Roundup). The touted benefits of that deal, and the logic of marrying crop science and pharmaceuticals, are yet to manifest themselves fully in sales and profit.
A premium valuation will need to be earned. From here, the gains to Bayer’s shares will depend on definitive progress both on the litigation — and on operational performance.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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