Monsanto Still Sows the Seeds of Doubt

(Bloomberg Opinion) -- Investors weren’t willing to give Werner Baumann the benefit of the doubt when Bayer AG’s CEO moved to shift the drugmaker’s business to crop science by buying U.S. seeds giant Monsanto Co. Reaction to the latest unwelcome news about the deal shows the credibility deficit persists.

Bayer warned on Wednesday that this year’s earnings per share would fall by a high single-digit percentage because of the timing of the Monsanto purchase. While the $63 billion acquisition adds sales and earnings, these are weighted to the first half of the calendar year. As the deal completed on June 7, a little later than hoped, the contribution to Bayer’s second-quarter numbers was small.

Monsanto Still Sows the Seeds of Doubt

Factor in the increase in Bayer’s share count from a stock offering to fund the transaction, and the hit to EPS is bigger than the company suggested in its previous warning of a “moderate” decline. The shares fell as much as 3.7 percent, wiping almost 3 billion euros ($3.5 billion) off Bayer’s market value.

The negative reaction is overblown, but that’s all the more reason for Baumann to ask why investors took fright. While Monsanto’s sales to early June won’t benefit Bayer’s income statement, it’s a different story for cash flow: Monsanto’s Ebitda is weighted toward the first half of the year, but cash tends to arrive in the second half.

Monsanto Still Sows the Seeds of Doubt

There are, nonetheless, questions for Bayer management to answer. The previous earnings guidance must have depended on the deal completing earlier in the second quarter. Bayer needs to explain why it couldn’t have flagged sooner that it wouldn’t be met. True, the company was forbidden access to Monsanto’s books until mid-August, pending completion of its last disposal to satisfy trustbusters. But it didn’t have any more information in February when it made its missed forecast.

Now consider the reaction to litigation in the U.S. over Monsanto’s Roundup herbicide. A California court awarded $289 million to a plaintiff who claimed the glyphosate weed-killer helped cause his cancer. Bayer says the product is safe and that it will vigorously contest the case. But the market is taking nothing on trust. The shares are pricing in a Roundup withdrawal, a 7 billion-euro settlement and adding a conglomerate discount, according to research by UBS.

Investors aren’t buying Bayer on the basis of its 2018 performance. What counts is where the company will be two years hence. But there are so many uncertainties around that question — the glyphosate litigation in particular — that Bayer can’t afford to add to the confusion with poor communication.

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

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

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