(Bloomberg) -- Billionaire Paul Singer’s Elliott Management Corp. has built a stake in Bayer AG and wants the German drugs-and-chemicals conglomerate to consider splitting in two, according to people familiar with the matter.
The activist investment firm wants the company’s management and board to evaluate breaking Bayer into separate pharmaceutical and agrochemical makers, the people said, asking not to be identified because the information is private. No meetings between Elliott and Bayer have yet taken place, the people said.
Elliott has held shares in Bayer for more than a year, the people said. There is no guarantee the fund will push management for a breakup, and it may instead choose to sell down its stake, they said.
Bayer shares closed up 1.7 percent in Frankfurt trading after Reuters first reported that Elliott held a stake, giving the company a market valuation of 59 billion euros ($67 billion).
Bayer is facing courtroom risks and operational challenges after completing the $63 billion acquisition of Monsanto Co. this year to transform itself into the world’s biggest maker of seeds and agrochemicals. Seeking to revitalize its health-care unit, the company last week announced plans to exit its veterinary arm, sell some struggling consumer-health brands and cut 12,000 jobs.
After completing the Monsanto acquisition, the company is a “likely candidate for a split,”’ Bloomberg Intelligence analysts Christopher Perrella and Michael Shah said Nov. 29 in a note.
Representatives for Elliott and Bayer declined to comment.
Bayer’s shares have declined 38 percent this year, as its major divisions have been under pressure. The chemicals unit is reeling from a U.S. court verdict that glyphosate, the key ingredient in Monsanto’s Roundup weedkiller, caused a former school groundskeeper’s cancer. A judge in October reduced the damages to $78.6 million from $289 million, but Bayer couldn’t persuade her to set aside the decision. There are more than 9,300 other plaintiffs.
Meanwhile, Bayer’s health-care arm, which would rank as Europe’s fifth-biggest drugmaker by sales on its own, is facing its own challenges. Bayer will begin losing patent protection for two blockbuster drugs in the next five years and has little under development to compensate. The Monsanto deal has absorbed resources that could otherwise have been used to strengthen health care.
Bayer is probably better off with Monsanto than it would be today if it hadn’t done the deal, Markus Manns, a fund manager at Union Investment, said on Friday before the Elliott stake became public. That’s because Bayer would have missed the wave of consolidation in agriculture companies, Manns said.
“Today the discussion would be totally different,” Manns said. “We probably really now would be talking about whether it makes sense to sell crop science and split up the company.”
The best strategy for Bayer could be to split crop and health care, Wimal Kapadia, a London-based analyst with Sanford C. Bernstein & Co., said in a note in October. “Management reception to this strategy remains unclear.”
The biggest concern would be if Bayer were to try to “fix” the pharmaceutical unit after 2020 with a large acquisition that would be “high risk, likely to be competitive and therefore expensive,” Kapadia said then.
Elliott hasn’t yet crossed the threshold of 3 percent, a hurdle above which German law requires investors to reveal their position. Elliott has taken stakes in German industrial giant Thyssenkrupp AG and engineering firm GEA Group AG. It has also jousted with the likes of Hyundai Motor Group, where it halted a restructuring plan, and Vivendi SA, which it defeated in a battle for control over the board of Telecom Italia SpA.
(Updates with units’ challenges from eighth to 13th paragraph.)
--With assistance from Tim Loh and Sarah Syed.
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