A popular weedkiller is wreaking havoc at drugs and chemicals giant Bayer.
The inventor of aspirin is in the grip of a huge shareholder revolt after its $63 billion purchase of Roundup owner Monsanto put the German company at risk from thousands of US cancer lawsuits tied to the weedkiller.
Over 55% of voting shareholders did not endorse the actions of management during last Friday’s annual meeting, a rebuke that Berenberg bank analyst Sebastian Bray described as “unprecedented” in Germany.
Investors have cause to be upset. Bayer’s stock price has collapsed by 40% since the Monsanto deal closed in June 2018. The company is now only worth roughly what it paid for the US chemical maker.
While not binding, the shareholder vote increased pressure on CEO Werner Baumann and forced Bayer’s supervisory board to issue a statement reiterating its support for the leadership team.
The purchase of Monsanto, which took almost two years for regulators to approve, didn’t always look like a dud.
Dow (DWDP) and DuPont had already announced a tie-up in agrochemicals when the Monsanto deal was struck in September 2016. So had ChemChina and Switzerland’s Syngenta. Bayer, the thinking went, needed to act in order to stay competitive.
But events over the past year have cast serious doubt on the wisdom of the purchase.
Two US juries have sided with men who claimed that glyphosate, the key ingredient in Roundup, caused them to develop cancer. Bayer is appealing both rulings, but could be on the hook for tens of millions of dollars in payouts.
That could be just the beginning. Bayer faces glyphosate lawsuits from roughly 13,400 US plaintiffs.
The company says that scientific research proves glyphosate is safe when used as directed, and is not carcinogenic. The US Environmental Protection Agency said the same earlier this week. But Bayer could still opt to settle the thousands of pending cases, according to analysts.
Damien Conover, an analyst who covers Bayer for Morningstar, estimates that it could wind up paying €2 billion ($2.2 billion) in costs related to glyphosate litigation.
In a worst-case scenario, Conover predicts costs could rise above €13 billion ($14.6 billion). It’s hard to put an exact number on the liability without knowing more about the quality of the cases, he said.
Moody’s said in a report Tuesday that settlement payments of €5 billion ($5.6 billion) would be manageable, but €20 billion ($22.4 billion) in payments could affect the company’s credit rating.
The question from investors is whether management did their homework on Monsanto. Some believe it’s time to consider dramatic structural changes, such as dividing up Bayer’s pharmaceutical and agriculture businesses.
“They are of the opinion that US legal liabilities are difficult to quantify and unlikely to go away any time soon,” Bray said.
Concerns about the company’s legal exposure were on full display at last week’s shareholder meeting.
Ingo Speich, who represented Deka Investment at the event, said he voted against the management because the Monsanto deal had been “value destroying.”
Deka is demanding “far more transparency” on the potential financial impact of litigation, Speich said. “The biggest problem with the share price is uncertainty,” he added.
Bayer Chairman Werner Wenning said in the statement of support for management that the “top priority” is to “vigorously and successfully defend the company” in court proceedings related to glyphosate.
Baumann, the CEO, acknowledged that the Roundup lawsuits and early verdicts had placed a “heavy burden” on the company and its investors. But he said market reaction had been “exaggerated.”
He argued that the company was right to purchase Monsanto, and that the acquisition was already contributing to the company’s bottom line.
Investors are unlikely to reward the company’s performance before its legal liability becomes clear.
“The market is not apt to give the company much credit as clouds of uncertainty hang over the business,” Bray said.