Analysis-Bayer investors weigh need for cash call amid stifling debt

By Ludwig Burger and Emma-Victoria Farr

FRANKFURT (Reuters) – Bayer may have to ask shareholders for fresh capital to shore up its finances even after the debt-laden German drugmaker slashed dividends last week in its latest effort to get wiggle room, analysts said.

But new CEO Bill Anderson may struggle to win over investors, who have seen the company’s value sink by two thirds since its $63 billion acquisition of Monsanto in 2018, which saddled it with costly litigation and debt.

The debate over a possible share issue comes as Anderson, who was hired last June to revive the company’s fortunes, prepares to deliver a strategic investor update in London on Tuesday. He is already cutting management jobs.

The company faces a deluge of problems including U.S. litigation alleging harm from weed-killer glyphosate, a development setback for its most promising experimental medicine, weak agriculture markets and investor pressure to separate or sell businesses.

Anderson is under pressure to cut net debt, which was almost 39 billion euros ($42 billion) at end-September, so he can invest in much-needed drug development projects, investors say.

“To create the structures that generate growth again, the pharma division needs acquisitions. I don’t see how this can be achieved by cutting dividends and costs alone,” said Fabian Wenner, wealth management analyst at Swiss bank Julius Baer.

“Bayer needs a breakout moment. I imagine that a rights issue could be an option,” he added.

He said the company could consider selling its consumer health products unit, valued by some analysts at 13-14 billion euros, but a fire sale would force the company to accept a discount.

Anderson does not have time on his side.

Martin Schnee, an analyst at independent equity research firm AlphaValue, said a capital increase worth 5 billion euros or around 25 euros per share, a discount to Tuesday’s closing price of 29 euros, could be called for if Bayer can’t sell assets in the short term.

“I could imagine Bayer winning over shareholders to back a capital increase,” he said, but added a steeper discount on the share sale could throw the transaction into doubt.

Divestment proceeds, such as a spin-off and partial sale of the agriculture unit, could help avoid a cash call, he said.

Two people close to Bayer said a capital increase was not on the agenda.

One of the sources said any consideration about it in the future would be influenced by the verdict of major credit rating agencies, where a downgrade translates into higher interest rates.

AlphaValue’s Schnee said that Bayer primarily needs to avoid the spike in borrowing costs that would result from slipping two or three notches, depending on the agency, into non-investment grade ratings.

Bayer declined to comment.

Barclays analysts, in a note earlier this month, said a capital increase, or a sale of the agriculture or consumer products business to a peer in the industry, might be needed.

SALE VS CASH CALL

Bayer last week slashed its dividend to cut debt and increase flexibility, keeping what analysts estimate would have been combined payouts of 6-7 billion euros.

Anderson is grappling with legacy issues from Monsanto, which was engineered by his predecessor Werner Baumann, mainly due to costly litigation over an alleged cancer-causing effect of glyphosate.

Discussion of a cash call prompted criticism from investors.

Markus Manns, a portfolio manager at Bayer investor Union Investment, called for the former Roche executive to make a full or partial sale of the consumer unit instead.

“As long as that option has not been thoroughly assessed, a capital increase would be an affront to shareholders,” he said.

A top 10 Bayer investor, who declined to be named, said Anderson would struggle to convince shareholders of the need for a cash call over internal restructuring and asset disposals.

Since the Monsanto deal closed in mid-2018, Bayer stock has lost 65% of its value, including reinvested dividends, compared with a 56% gain in the pan European healthcare index.

Anderson has faced calls by some investors to break up the group to boost its share price. The CEO has said he is still reviewing options.

People familiar with the matter told Reuters he will likely hold off on presenting specific break-up plans next week and focus on an internal management overhaul and job cuts.

(Reporting by Ludwig Burger, Emma-Victoria Farr and Patricia Weiss; Editing by Josephine Mason and Christina Fincher)

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