Bayer Slumps as Bleak Crop Outlook Saps Monsanto Rationale

(Bloomberg) -- Bayer AG slumped after the agriculture and pharma giant said it would have to slash costs as the pandemic's impact on farm commodities extends into next year, further undermining the rationale for its $63 billion purchase of Monsanto Co.

The stock fell as much as 13% in German trading, knocking 6.6 billion euros ($7.7 billion) from a market value that has sagged well below the price paid for Monsanto. Bayer, already reeling from a legal battle over its Roundup herbicide, said late Wednesday it would cut 1.5 billion euros of annual costs and may also eliminate jobs and sell businesses.

Chief Executive Officer Werner Baumann is confronting multiple challenges just after getting his contract extended. Besides Roundup, the German company faces slumping crop prices and weakening demand for biofuel that threaten its agriculture unit two years after the controversial Monsanto takeover.

“It was already quite clear that the growth prospects of Monsanto had deteriorated over the last 2.5 years, though the magnitude of this decline is greater than expected,” Sebastian Bray, an analyst at Berenberg Bank, said by email.

The pandemic has hurt demand for agricultural commodities and biofuel, exacerbating headwinds like trade tensions, competition and the African swine fever.

Bayer's crop business, which delivers just under half of sales, will face a “deeper than expected” impact that probably won't improve in the near term, Bayer said in a statement. The company expects to take billions of euros in non-cash impairment charges on assets in the agricultural business.

Citi analysts cut their rating on Bayer to hold from buy. The “long suffering” buy recommendation had been based on the idea that the stock was cheap and a resolution to the Roundup litigation was near, Peter Verdult and Andrew Baum wrote in a note.

“We were wrong,” they said, adding that concerns will probably intensify over Bayer's long-term growth outlook.

What Bloomberg Intelligence Says:

Bayer's 2021 guidance is likely to dent sentiment, with weakness driven by its Crop Science unit, which has has been heavily hit by Covid-19 and currency. We believe the guidance could drive cuts to company-compiled consensus by at least 2% on revenue and 10% on core EPS.

-- Michael Shah, BI pharma analyst

While completing midterm planning, Bayer management decided to lower expectations for the crop division through 2021, and perhaps even into 2022, Baumann said on a call with investors Wednesday.

“It is totally clear that the impairment is driven by that lack of growth,” he said. “We cannot outgrow, to the extent of our original assumptions, a market that doesn't grow at the level we need it to.”

The company's pharmaceutical arm, meanwhile, is facing patent expirations for two blockbuster medicines in the next few years while its pipeline of potential future products is regarded as weak.

©2020 Bloomberg L.P.