Bayer Finds a Time Machine to Make a Nifty Market Trade

(Bloomberg Gadfly) -- Bayer AG has sold a big stake in chemicals subsidiary Covestro AG for a price it has barely any control over. The move is smarter than it looks.

The German drugmaker has been trimming its Covestro stake since selling part of the business in a 2015 IPO. On jettisoning another chunk earlier this month, it agreed to a lock-up preventing it from offloading more shares until mid-December. Yet on Friday it announced the sale of a further 7 percent, taking its stake to below 25 percent.

The deal is permissible as the existing lock-up travels with the shares to the new owners. For that reason, the price Bayer ultimately receives will depend on where stock is trading after mid-December. Bayer gets 1 billion euros ($1.2 billion) initially but says it retains "economic exposure". So if the stock goes up between now and the lock-up expiry, Bayer looks set to receive more cash. If the stock goes down, it appears to pay some money back. Whether the economics are symmetrical and perfectly matched to the share price isn't clear.

Bayer is precluded from selling at today's price either way, so it could have just waited until December and done the deal then. But there was an advantage in moving now. The European winter holidays are a dicey time for share sales -- the market might have been completely shut to a placing of this magnitude. What's more, the deal allows Bayer to de-consolidate Covestro from its accounts ahead of 2017 annual results. These should look a lot cleaner now.

It's a rare transaction. Selling stock blocks with a price-adjustment mechanism is fiddly and usually possible only when one buyer, like a sovereign wealth fund, is up for taking the slab. Bayer says there were "buyers" for its stake, but it would be surprising if they were more than a handful.

If this is effectively a bilateral block trade, it would be the second in a week, after Rocket Internet SE's sale of a 13 percent stake in takeaway group Delivery Hero AG to co-investor Naspers Limited. The stock market clearly isn't always the best place to sell stock -- whether today, or tomorrow.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

To contact the author of this story: Chris Hughes in London at chughes89@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.