(Bloomberg Opinion) -- Activist investor Elliott Management Corp. wants Bayer AG to settle thousands of lawsuits claiming the pharma group’s Roundup weedkiller causes cancer. Remove the uncertainty caused by the litigation, and 30 billion euros ($34 billion) of value could be released, Elliott argues. That is easier said than done.
If Bayer traded at multiple of 15 times estimated earnings, in line with its peers, its market capitalization would be closer to 95 billion euros rather than its 56 billion euros today. That estimate is even higher than the company’s market value was in August just before the first adverse ruling against Roundup.
The gap largely reflects the uncertainty of the situation – both the possible costs of further legal defeats and the difficulty of gauging future sales of Roundup and other agricultural herbicides based on the chemical glyphosate.
Bloomberg Intelligence reckons a settlement could cost between $6 billion and $10 billion. From shareholders’ perspective, that’s a price worth paying if clarity restores even a third of Bayer’s lost market value. Hence Elliott’s request.
Bayer is acting like it gets the idea. It is making positive noises about mediation. It has also hired a star lawyer: the company will have a better chance of getting a fair settlement if it can show it has a stronger hand in the courtroom.
Fighting to settle, rather than win, would be the best approach. Bayer has argued Roundup is safe when correctly used, but it has lost three consecutive cases. Its expert evidence has been weighed by juries and has failed to convince them.
A new legal team could try to put different arguments and experts in front of jurors. But consider, too, the heavy punitive damages being awarded – $2 billion in the last case. These are likely to reflect jurors’ dim view of Monsanto's corporate conduct as concerns about the weedkiller’s safety emerged. This issue will recur in every future case.
Appealing would cost Bayer time. By the same token, a settlement would deliver a certain and faster resolution for the thousands of plaintiffs. The individual circumstances of each case make it hard to gather them together into a swiftly-resolved class action.
The snag is that even a fair settlement would not mean a return to business as usual. The best financial scenario for the company would be a deal that is affordable, with farmers continuing to use glyphosate and Roundup staying on sale, perhaps with modified instructions about how consumers should use it appropriately. This is not assured.
Moreover, Bayer will still merit a management discount for all that has happened, and a conglomerate discount given its unproven strategy of combining pharmaceuticals and crop science.
CEO Werner Baumann misjudged the risks of buying Monsanto, a deal that brought Roundup with it; he has taken too long to revise his litigation strategy. He could yet turn the situation around by resolving the lawsuits and extracting synergies from the acquisition. Until he does, the jury is out both on his future and a break-up.
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net
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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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