E Lots More Than Aspirin: What You Should Know About Bayer

Bayer (BAYRY) is a conglomerate combining various businesses under one umbrella. If its acquisition of Monsanto (MON) were to close, its seed business would become a very important component. It has a large medical device business and a major pharma business and a large animal health business. It also owns a major equity stake in Covestro which it reduced yesterday by 10%. The equity stake went from ~40% to ~30% percent. Bayer got $1.4 billion in return. Which values the remaining stake at $4.2 billion.

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The conglomerate is attractive because it is not very expensive at 16x free cash flow, 15x EV/EBIT and 2.14x. If we took out the Covestro stake it would look even more attractive.

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Bayer is paying a steep premium for Monsanto and if the market doesn’t rerate Bayer afterward it is going to be a value destructive transaction. There is however a good chance it will not happen as the EU launched a thorough investigation.

The conglomerate is mostly like a pharma but it trades at a large discount to big pharma peers. I’ve taken these two metrics but it’s also true for enterprise value metrics.

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It acquired Monsanto at a huge premium to these multiples. The EU is looking at it closely which means its existing seed business is a strong complement or even highly comparable. Meaning that by treating Bayer as a pharma we aren’t doing it a huge favor.

Bayer doesn’t even have a bad pharma portfolio either. Many of its competitors struggle with patent portfolios that are getting long in the tooth. With many of the big diseases covered and the cures that were easier to find all picked off, pharma is facing the problem it needs to invest ever more money to treat smaller patient groups.

Bayer’s biggest sellers are Xarelto and Eylea. These have quite a bit of life left which positions Bayer favorably. A problem for Bayer is that it gets a lot of bad press on the widely prescribed Xarelto in addition to litigation costs dealing with the scourge of the class action lawsuit.

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Disclosure: no positions in any stock mentioned

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