The Bayer AG logo and flags are pictured outside a facility of the German pharmaceutical and chemical manufacturer in Wuppertal, Germany.
Wolfgang Rattay | Reuters
Company: Bayer AG (BAYRY)
Company: Bayer AG is a €55 billion German multinational pharmaceutical and biotechnology company. It operates in three segments: (i) Pharmaceuticals (approximately EUR 6 billion EBITDA); (ii) Consumer Health (approximately €1.5 billion EBITDA); and (iii) Crop Science (approximately €6.5 billion EBITDA). The company acquired Monsanto for €54 billion in 2018 and has since been plagued by multiple lawsuits related to Monsanto’s cancer-causing herbicide product Roundup.
market value: $60.5 billion ($15.41 per share)
Activist: Inclusive Capital Partners
Percentage ownership: 0.83%
Average cost: n / A
Activist Comment: Inclusive Capital Partners is a San Francisco-based investment firm focused on increasing shareholder value and promoting sound environmental, social and governance practices. It was founded in 2020 by ValueAct founder Jeff Ubben to harness capitalism and governance in the pursuit of a healthy planet and the health of its inhabitants. As a pioneering active ESG investor (“AESG”), Inclusive strives for long-term shareholder value through active partnerships with companies whose core businesses provide solutions to this pursuit. Their main focus is on environmental and social value creation that creates value for shareholders.
What’s wrong?
Inclusive Capital Partners has acquired a 0.83% stake in BAYRY for investment purposes.
Backstage
As an impact investor, Inclusive’s portfolio companies always have the dual mandate of being a compelling value proposition and making a measurable positive impact on the environment and society. The thesis of the company at Bayer is no different. Inclusive believes that Bayer, as a leader in the global agricultural industry, is well-positioned to develop and disseminate technologies that meet humanity’s challenge to increase food supplies in the face of increased global demand, while reducing environmental impact.
Arable farming makes a significant contribution to global greenhouse gas emissions. Bayer’s crop science division accounts for around 25% of global crop cultivation. Bayer has done a good job of achieving its core value goal of increasing crop yields and agricultural productivity by using innovative technologies and developments in crop science that also have significant positive impacts on the environment. For example, their short-growing corn contributes 15% more productivity while retaining more carbon in the soil and producing less waste than regular tall corn varieties, which are more easily knocked over by the wind. In addition, dry rice seed has the potential to increase yield per hectare and produces fewer methane emissions than wet rice. Additionally, Bayer is working to advance GM crops using CRISPR technology, which Inclusive believes will be more accepted and brought to market faster than GM crops. New crops, including those that have been genetically engineered, are expected to provide a variety of benefits such as: Ultimately, these crops lead to increased food security and yields of staple crops such as corn, wheat, rice and soybeans.
Inclusive highlights Bayer’s position in Crop Science, exemplified by the company’s size, talent, significant cash flow and $2 billion R&D budget. All of this can be used to acquire, develop and scale new technologies with the potential for system change. Inclusive’s focus on impact at scale is why the firm sees the conventional ESG approach of “rejecting and replacing” imperfect incumbents as inadequate to address global challenges.
Inclusive often invests in companies where ESG improvements drive shareholder value. In this case, it’s almost the other way around: by creating shareholder value in the form of a higher share price and lower cost of capital, Bayer can fund additional ESG opportunities that also increase crop yield and profitability.
There are several ways to create this shareholder value. First, the board should explore deconglomeration, most notably through a spin-off from Monsanto, which would pave the way for a sale of at least its consumer health business. Bayer currently trades at about 7 times earnings, while its pure-play crop science peer, Corteva, is trading closer to 20 times earnings. If Monsanto received a 20x multiple as a pure game, even after deducting $10 billion in litigation liability, it would be worth Bayer’s entire market cap today. Second, the company could end this Roundup-related lawsuit with a global settlement. Between August 2018 and May 2019, Bayer lost three lawsuits. This resulted in approximately $11 billion in settlement payments. However, the company has won its last six lawsuits, which should make it easier to settle the rest. Even a $10 billion global settlement would likely benefit the stock price, as it would remove a ton of uncertainty and make Bayer a buyable stock for many investors who wouldn’t be touching it now. Third, Inclusive is aiming to hire a new CEO at the next annual meeting this spring. Werner Baumann has been CEO since 2016. In September 2020, the company extended his contract until the end of April 2024. Baumann was instrumental in the Monsanto acquisition and is arguably the last person to now lobby for the spin-off and settlement of the receivables. This must be done by a new CEO who is not an owner of the Monsanto deal.
Inclusive is a friendly investor who is often invited into committees and rules through persuasion. We expect it to be no different, especially since the company is likely to have plenty of support from other shareholders who have been voicing their displeasure for many years. In 2019, Baumann lost a vote of no confidence at the company’s annual general meeting when 55.5% of investors voted against exoneration of top management. In March 2022, Temasek Holdings (then 3% shareholder) requested Baumann’s replacement as CEO. In April 2022, shareholders voted against a management compensation plan.
Jeff Ubben has always liked companies that have been misunderstood by the market and here he has one more. Due to the Monsanto litigation, Bayer is perceived as a bad actor and is rather uninvestable for many. The spin-off of Monsanto and the settlement of the lawsuit should remove that stigma. Focusing on the ESG innovations that increase crop yield and efficiency will transform the company’s image for impact and value. This is an excellent example of how Inclusive actively and qualitatively leverages ESG and activist value creation together for the benefit of shareholders.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving portfolio companies’ ESG practices.