March 20, 2019 / 1:23 PM / 3 months ago

Breakingviews - Legal woes poison Bayer’s prospects

Monsanto's Roundup weedkiller atomizers are displayed for sale at a garden shop near Brussels, Belgium November 27, 2017. REUTERS/Yves Herman

LONDON (Reuters Breakingviews) - Roundup’s noxious effect is leaching deeper into Bayer. Shares in the German chemicals group slumped again on Wednesday after a second U.S. court said its widely used weed killer causes cancer. Bayer has shed $34 billion of market capitalisation since the first adverse ruling last August, effectively exterminating any value in its CropScience unit, which includes Roundup. With thousands of claims in the wings, even that may be too generous.

The latest dose of bad news gives further ammunition to critics of Bayer’s $62.5 billion takeover of Roundup maker Monsanto, which closed last June. The 150-year-old company run by CEO Werner Baumann hoped to combine its crop-protection business with Monsanto’s seeds expertise, enabling it to cross-sell more products to farmers. But the purchase price exceeded the present value of stated cost savings by $7 billion, according to Breakingviews calculations. And now it seems Bayer also bought a potentially vast legal liability.

Tuesday’s decision by a San Francisco jury was whether glyphosate, the Roundup ingredient that kills plants, can also give people cancer. Importantly it was a federal court, meaning its decisions can be a guide elsewhere in the United States, where 11,200 plaintiffs have lodged claims related to Roundup. The second phase of the trial must decide whether Monsanto knew about glyphosate’s cancer-causing properties and didn’t fess up.

Bayer is keeping its faith in studies that exonerate glyphosate. But the financial situation looks precarious, not least because juries tend to rely more on human emotion than hard science, especially when it comes to damages. Last August a California court awarded $289 million to a school groundskeeper who blamed his cancer on Roundup, though this was later reduced to $78 million. Even then, applying the same liability to all existing claimants produces a sum of $870 billion – more than 13 times Bayer’s market value.

Baader Helvea analysts reckon that if the CropScience division’s value is zero, Bayer is worth 60 euros per share. That’s only 1 euro less than the company’s share price, which dropped 12 percent on Wednesday morning. The worst-case scenario remains highly unlikely. But Tuesday’s decision also erases the chances that last year’s ruling melts away on appeal. Until the legal claims are resolved, working out Bayer’s value involves reconciling emotion with science.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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