Bayer faces Monsanto showdown, despite strong earnings
German chemicals giant is likely to face grilling over acquisition of company
BERLIN—Bayer AG’s shares rose over 3% Thursday on betterthan-expected results, giving the company a brief respite ahead of Friday’s potentially unruly shareholder meeting, as investors grow impatient with the company’s legal woes in the U.S.
The German chemicals and pharmaceuticals company reported an above-expected rise in adjusted earnings before interest, taxes, depreciation and amortization and sales, driven mostly by the integration of Monsanto Co., which it acquired for $63 billion last year.
But Bayer said the number of lawsuits tying Monsanto’s Roundup weedkillers to cancer rose another 20% since late January. As of April 11, 13,400 plaintiffs had claimed the weedkillers containing the chemical glyphosate had given them cancer and other illnesses. Bayer has so far lost the first two Roundup suits in California. A third trial is under way there and four more are scheduled to begin this year in Missouri and Montana.
The Monsanto acquisition was meant to add a strong second leg to Bayer’s midsize pharmaceuticals business. But it has become an open-ended liability that has chopped off more than a third of the company’s market capitalization and unnerved investors. Some shareholders are now openly criticizing management for underestimating the acquisition’s legal risks and are expected to vent their frustration at Friday’s annual general meeting in Bonn, Germany.
“Today, one can’t talk of a successful purchase if it brings such striking legal and reputational risks,” said Ingo Speich, head of corporate governance at Deka, a fund manager that owns roughly 1% of Bayer.
Bayer’s position has been that there is overwhelming scientific evidence that Roundup is safe to use. It is appealing the verdicts and continues to defend the merits of the Monsanto deal.
But Chief Executive Werner Baumann and his fellow directors will face a grilling on Friday about the merits of the deal and how they are working to contain the damage, according to several large shareholders.
Some—including BlackRock Inc., which holds more than 5% of voting rights—plan to reject or abstain on a motion to endorse the board’s actions for 2018, according to a person familiar with the matter. Some proxy advisories, as well as Deka, have called on shareholders to express their dissatisfaction by voting against management.
While such a no-confidence vote is largely symbolic, it is seen as an important gauge of investor confidence. A strong rebuke could put Mr. Baumann under increased pressure to resolve the crisis engulfing the company.
Axel von Werder, who runs the Berlin Center of Corporate Governance at Berlin’s Technical University, said “if a significant number of shareholders vote against it, then every supervisory board must ask itself the question whether it still has the right management in place.”
Bayer’s management and supervisory boards have rejected the criticism as unfounded. They said both boards thoroughly reviewed all risks of the deal and determined the Monsanto acquisition didn’t present substantial risks, legal or otherwise.
Few shareholders expect Mr. Baumann to go. He and Chairman Werner Wenning share a close bond and the supervisory board trusts them, according to people familiar with the company. But some Bayer executives are growing nervous that large shareholders could start to unload shares, said one of the people.
David Einhorn’s Greenlight Capital Inc. exited a 2 12 ⁄ year investment in Bayer. “Essentially, this investment failed at nearly every turn,” the hedge fund’s officials told investors in a February letter, mentioning the Roundup litigation as well as troubles in Bayer’s pharmaceutical and consumer health businesses.
Peter Verdult from Citi said Thursday’s results weren’t likely to distract investors from the legal concerns. Analysts and investors have their eyes on the next trials and the company’s appeal on the first California verdict.
Until there is more clarity over how the legal battle will end, Bayer could at least in the short term be shielded from becoming the target of activists trying to push the company for more radical changes, such as a breakup, some analysts and investors said.
Elliott Management Corp., a hedge fund with an aggressive record at forcing management and strategic changes, has built up a small undisclosed stake in Bayer—but there is no sign it is pushing for specific changes, according to people familiar with the matter. Bayer and Elliott both declined to comment.