LONDON, Jan 11 (Reuters Breakingviews) - Bayer’s (BAYGn.DE) crop of improving businesses looks ripe for a split. The $58 billion drugs-to-seeds conglomerate has for years traded at a hefty discount to the sum of its parts, but refused to do anything about it. Activists like Jeff Ubben’s Inclusive Capital Partners may now, however, be in a better position to push for a breakup.

Bayer has been a perennial underperformer since its disastrous $66 billion acquisition of Roundup maker Monsanto in 2018. An expensive takeover was soon followed by a wave of court cases from claimants who said the group’s weedkiller gave them cancer. Persistent disappointment and a clunky conglomerate structure has hurt the stock, prompting analysts at Bernstein to argue for a breakup. Ubben isn’t the first activist to see value: Elliott Advisors took a stake in 2019. Smaller peer Bluebell Capital Partners has also bought in recently.

On numbers alone, the case for a split is clear. Assume Bayer’s pharmaceutical unit is valued at 8 times 2023 EBITDA and its core seeds business at 13 times, both in line with peers. Using UBS forecasts, they would be worth 50 billion euros and 88 billion euros respectively. Its smaller consumer drugs division might fetch another 18 billion euros, using peer Reckitt Benckiser’s (RKT.L) 12 times multiple. Add them up, take off debt, pension liabilities and a further 6 billion euros of future Roundup litigation costs, and Bayer’s equity could be worth nearly 110 billion euros. That’s nearly twice the current market capitalisation.

Yet Bayer’s many challenges also made a breakup tricky: the drugs unit, for example, has been overshadowed by a looming loss of exclusivity on blood thinner Xarelto in 2026. That’s changing: the German group now thinks a new drug against dangerous blood clots could deliver 5 billion euros in annual sales, offsetting Xarelto’s decline. That division may now be more appealing to cash-rich drugmakers. Meanwhile, the crop science business, which specialises in genetically modified seeds, is well placed to capitalise on food security concerns triggered by the war in Ukraine.

The activists’ timing is good for another reason. Current Chief Executive Werner Baumann, who orchestrated the Monsanto deal, is set to leave in 2024. That gives the funds a chance to influence the future CEO and put a breakup on the table. A lot depends on Baumann’s successor. A credible figure may help the share price recover. But if Bayer sticks to its clunky structure and its stock continues to lag, then even more activists are likely to come knocking.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

Inclusive Capital Partners, run by hedge fund veteran Jeffrey Ubben, said on Jan. 9 that it had acquired a 0.83% stake in Bayer, as the German drug and agriculture group continues to suffer from a depressed share price.

Activist investor Bluebell Capital Partners has also built a stake in Bayer and is pushing for a breakup, Bloomberg reported on Jan. 10, citing sources.

Bayer said on Jan. 10 that Asundexian, an experimental drug against blood clots and strokes, could make more than 5 billion euros in peak annual sales. The drug may help Bayer replace revenue from one of its pharmaceutical bestsellers, Xarelto, which is set to lose protection from key European patents in 2026.

Shares in Bayer are up over 9% since Jan. 9 when Ubben’s stake was revealed.

Editing by Neil Unmack and Oliver Taslic

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