Bayer AG shareholders are daring to imagine a future free of the litigation that has dogged the pharma group’s Roundup weedkiller. It’s an increasingly plausible scenario, and one investors are itching to price in.
Evidence is mounting that the German drugmaker is serious about settling the thousands of claims alleging Roundup is responsible for cancer. Bayer’s lawyers have suggested a deal worth between $6 billion and $8 billion, Bloomberg News reported on Friday. The talks are sufficiently advanced that lawyers are seeking a delay to upcoming court cases.
Bayer had been energetically contesting the claims, insisting that Roundup is safe when used as directed. The stock jumped as much as 11%, adding 6.6 billion euros ($7.4 billion) to the company’s market value, highlighting the commercial case for being pragmatic and settling rather than fighting on.
The size of the possible settlement looks close to what analysts had predicted using the drug industry as a precedent. Bloomberg Intelligence put the likely cost of a deal at $6 billion to $10 billion. As things stand, it’s not clear if Bayer’s range is an opening shot. Lawyers for the plaintiffs are seeking more than $10 billion. Whether a deal can be reached, and its final cost, remain to be seen. Chief Executive Officer Werner Baumann has chosen his words carefully, saying last month the company would be open to a settlement that was reasonably priced and that definitively ceased litigation.
His challenge is to balance the hard costs of a deal with the boost to the share price it could create. Bayer can afford to pay – but it would be a stretch. Its $39 billion of net debt puts leverage at 3.3 times the last 12 months’ Ebitda. A $10 billion settlement would push leverage to roughly four times Ebitda. That’s still less than what it was immediately after the company’s takeover of Monsanto Co. last year, the fateful deal that brought Roundup with it.
The upside for shareholders looks to be more substantial. Even after Friday’s jump, Bayer trades on 8.5 times this year’s estimated Ebitda, less than the 12 times average of its peers in the pharmaceutical industry. Suppose worries about Roundup fade, allow for a conglomerate discount to reflect the company’s unproven model of combining crop and life sciences, and say the stock re-rates to 10 times. Bayer’s enterprise value would then be 119 billion euros. Deduct net debt and, say, $10 billion for a settlement and the equity would be worth 71 billion euros, 17% more than the company’s current market value.
Baumann has seen the market’s appetite for clarity here. His investors want him to get this done and to get on with the next big job – making the Monsanto deal deliver.
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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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