Bayer Crop Science 2023 Annual Report Highlights and Analysis
Index:
Introduction and Capital Markets Day 2024
Texas Two-Step and Bayer Assets
Bayer Crop Science 2023 Financial Results and Financial Scorecard
Research and Development, Innovation and Partnerships
Capital Expenditure
Areas of Business Expansion
Final Thoughts
Introduction and Capital Markets Day 2024
In the first week of March, Bill Anderson and the Bayer executive team shared the news that the Bayer business units would be kept as is, stating the following during his prepared remarks:
In short, on the question of structure, our answer is not now. And this shouldn't be misunderstood as never. Of course, we'll keep an open mind. We always do that, but our priority is on tackling our challenges, boosting performance and creating strategic flexibility. We're convinced that this approach is what's best for Bayer.
With that, Bayer highlighted the four pillars for moving the business forward, deemed the “challenges greatly limiting” Bayer’s ability to choose their own destiny, whether that be as a 3-division company or in smaller parts.:
building a strong Pharmaceuticals pipeline
addressing glyphosate and PCB litigation (along with new strategies to mitigate that include lobbying efforts)
reducing debt (cutting dividend)
continuing to implement its radical new operating model, Dynamic Shared Ownership (DSO), to improve performance
The “street” didn’t appear to like the news or the guidance delivered on March 5th, with the stock dropping that day and ending down for the week:
Source: Google
The Bayer executive team elaborated on the rationale:
We seriously considered the structure of our company. We did this with the help of numerous external advisers and a set of assessment criteria that included valuation levels, value creation, speed of execution, execution certainty, timing of cash generation and the resulting leverage ratios and the impact on our future optionality.
When it comes to an IPO or a spin, this would require an all-hands-on-deck effort for 18 to 24 months, and cash contributions would be delayed beyond that time frame. In the meantime, the leverage ratios of RemainCo or NewCo could go up significantly, and that could jeopardize our access to reasonable financing.
I incorrectly predicted a Crop Science spinout— whether that meant breaking up the business itself (eg: selling CP separate from seed, or spinning it out together). The trend in all industries, along with in agriculture, is towards singular efforts— focusing and simplifying the business from an internal perspective and external perspective and becoming more attractive to outside investors not wanting the company to “diversify” industries for them.
For now, Bayer has opted to operate in it’s continued pre-existing form.
One thing I do want to highlight, is the concept that activist investor Jeff Ubben has put forth to Bayer, known as the “The Texas Two-Step.”
Texas Two-Step
The "Texas Two-Step" is a legal and financial strategy that companies can use to manage liabilities, particularly those arising from lawsuits, in a way that allows the business to continue operating while addressing the claims.
In Bayer’s instance, it would be used to resolve the tens of thousands of lawsuits and liabilities surrounding glyphosate and PCB’s.
The maneuver gets its name from the use of a Texas state law that lets companies split their assets and liabilities into separate units, then place the unit loaded with liabilities into bankruptcy to drive a global settlement. This approach has been used by several corporations facing massive liability claims, such as asbestos exposure lawsuits.
Essentially, Bayer would restructure by creating two separate entities— one entity ("NewCo") takes over the valuable assets and ongoing operations of the business (all the actual IP, products etc), essentially becoming the operational arm free from legacy liabilities. The other entity ("OldCo") inherits the liabilities, such as lawsuits or debt obligations, that the company wants to isolate. This segregation is intended to protect the valuable assets from being directly impacted by these liabilities. Then the entity holding the liabilities (OldCo) files for Chapter 11 bankruptcy protection. This step is crucial because Chapter 11 allows for reorganization under the bankruptcy code, providing the entity the opportunity to deal with its liabilities in an organized manner. The bankruptcy process involves negotiations with creditors and claimants to settle outstanding liabilities, often at a fraction of their original value.
Bayer is allegedly looking at this action to manage their current situation.