Slides from the 2016 Robin Hood Investors Conference by David Einhorn, founder and president of Greenlight Capital, on Bayer and Monsanto deal; titled, “Have Your Cake And Eat It Too.”
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A Love Story
This is a story about a newly engaged couple.
As with all love stories, there is conflict, and an uncertain ending.
Will something get in the way of true love? Or will they consummate the marriage and live happily ever after?
We Like Cake
Our couple is Bayer and Monsanto, and as I walk you through their journey, there is one thing you need to keep in mind:
Whether they make it to the altar, or get thwarted along the way, there’s going to be a celebration for Bayer shareholders either way.
With cake. And we like cake.
A few years ago, I was a bear on Bear; today I am a buyer of Bayer.
Bayer is worth about 73 billion Euros with an Enterprise value of 104 billion Euros.
Historically a chemicals and pharmaceutical company, Bayer is transforming into a life sciences company.
It spun off Lanxess in 2005, and is now shedding Covestro, its remaining chemicals business.
So Long Chemicals
Think of Covestro as the ex?boyfriend in need of a new mate – one more compatible withits cyclical nature.
Last year Bayer sold 31% of Covestro in an IPO, with plans to divest the rest.
Bayer x Convestro
What remains is a premium life sciences business with high barriers to entry and an excellent competitive position.
It is made up of four primary divisions: Pharma, crop science, consumer health, and animal health.
In 2015, it had total revenue of 34.3 billion Euros.
A New Boyfriend
With the ex gone, the market expected Bayer to further solidify its pharma business by courting a clean?shaven, well?to?do pharma partner.
Instead, it decided to go with a rough cut, crop sciences dude named Monsanto, and the market did not respond well.
The stock had already been falling from the mid 130s last July to about 100.
A couple late stage pipeline products disappointed.
The continued ag cycle weakness caused earnings expectations for 2016 to come down from a high of about 8 Euros per share to a low of 7.25.
When Bayer announced this corny acquisition, the stock collapsed to 85 Euros per share, or only 11.3x earnings.
See the full slides below.