(Bloomberg) — Bayer AG shares are facing a make-or-break few weeks, with two upcoming court developments key to stemming a more than $60 billion wipeout in market value since the German company\u2019s ill-fated purchase of Monsanto eight years ago.<\/p>\n
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Investors are awaiting a US Supreme Court ruling on Bayer\u2019s bid to stop tens of thousands of lawsuits claiming that Monsanto\u2019s Roundup herbicide should have been labeled as a cancer risk. Around the same time, a fairness hearing over a separate $7.25 billion class-action settlement to resolve current and future cancer lawsuits over Roundup is also scheduled.<\/p>\n
If most of the litigation is resolved, the stock would become more investable and could rise to \u20ac50, according to Jefferies analyst Michael Leuchten. In a downside scenario, with another double-digit billion-euro litigation provision and a multi-decade overhang, the shares could fall to \u20ac30, he wrote. Bayer closed at \u20ac35.79 on Thursday.<\/p>\n
\u201cThe litigation overshadows everything,\u201d said Markus Manns, portfolio manager at Frankfurt-based asset manager Union Investment, a Bayer investor. \u201cOnly once there is clarity on the litigation can the company develop a reliable financial plan regarding earnings growth, debt reduction and other priorities.\u201d<\/p>\n
A Bayer spokesperson said Monsanto has \u201ca multipronged strategy\u201d and is \u201cconfident but prepared\u201d for all outcomes with regard to both the Supreme Court case and the class settlement agreement.<\/p>\n
The Supreme Court is expected to rule by early July. Justices heard arguments in April, weighing a $1.25 million jury verdict won by a Missouri man who blamed Roundup for his non-Hodgkin lymphoma. Bayer contends that since US regulators didn\u2019t require a cancer warning, federal law bars the Missouri suit and others like it.<\/p>\n
A favorable outcome in the Supreme Court will help to ease Bayer\u2019s legal issues because it would wipe out failure-to-warn theories that have provided the basis for big-dollar verdicts in Roundup cases. The April hearing was less positive for Bayer than some had expected, and the shares have been trending lower since then.<\/p>\n
Listen: Bayer\u2019s Cancer Claims Roundup at US Supreme Court: BI Podcast<\/p>\n
Still, analysts at Bank of America Corp. recently cited a legal expert who sees a 70% probability that the court rules in Bayer\u2019s favor. And Barclays Plc analyst Charles Pitman-King expects the company \u201cto make significant progress in resolving the majority of its outstanding litigation overhang,\u201d helping it to unlock its fundamental valuation.<\/p>\n
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Settlement Hearing<\/p>\n
The other key milestone is over Bayer\u2019s $7.25 billion proposal to settle thousands of current and future Roundup claims. A fairness hearing is scheduled for July 9 in state court in Missouri, but opponents of the settlement have asked for a transfer to San Francisco to get the case in front of a federal judge who has already publicly noted the deal\u2019s flaws. Bayer objected the move and said it\u2019s confident it has good arguments for the case to be returned to Missouri\u2019s courts.<\/p>\n
Potential changes to the location and, therefore, timing of that decision have also unsettled investors, who are keen to move on from the Monsanto saga.<\/p>\n
Bayer investor Manns thinks the company is likely to get its way in at least one of the cases. \u201cI expect that a majority, likely more than 80%, of plaintiffs will support the proposal, as the settlement terms are very favorable,\u201d he said.<\/p>\n
\u201cHowever, if both efforts fail, then we would be looking at a significant, possibly catastrophic, setback for Bayer. The long-term financial uncertainty would remain. Investors would never know when the next \u20ac5 billion settlement payment might be required.\u201d<\/p>\n
Bayer has already paid more than $11 billion in Roundup settlements and still faces more than 65,000 current suits blaming its active ingredient, glyphosate, for causing non-Hodgkin lymphoma, according to securities filings. The shares are down more than 60% since the company completed the $63 billion Monsanto deal.<\/p>\n
\u201cBayer\u2019s hubristic purchase of Monsanto, with what must be viewed as woeful due diligence, has been the ultimate corporate nightmare that keeps on giving,\u201d said Ketan Patel, a fund manager at the family office Whitefriars, which doesn\u2019t own Bayer shares.<\/p>\n
Patel sees risks to Bayer around both rulings, noting that a Supreme Court decision against the company \u201ccould open the floodgates in every State where Roundup was sold, and where the rules surrounding labeling are interpreted differently from State to State.\u201d<\/p>\n
Many are more positive on the company\u2019s prospects. The shares have 16 buy ratings among 21 analysts tracked by Bloomberg, with an average price target that suggests more than 40% upside. For Barclays\u2019 Pitman-King, who rates Bayer overweight, the resolution of litigation could also open the door to a possible consumer health separation in future, helping the stock achieve its estimated \u20ac53 to \u20ac60 sum-of-the-parts valuation.<\/p>\n
Still, even if the two upcoming cases go Bayer\u2019s way, the company has other legal battles to contend with. While Monsanto stopped supplying toxic chemicals known as polychlorinated biphenyls \u2014 or PCBs \u2014 to customers for use in their products decades ago, the company has been sued by state and local governments, school districts and individuals.<\/p>\n
Bayer has already agreed to pay almost $2 billion in settlements in PCB cases, and potentially faces billions of dollars in exposure from a growing number of lawsuits over PCB products filed by state and local governments, school districts and individuals. It is pursuing a strategy to recoup some of its litigation costs from other companies, such as General Electric Co., that were large users of the chemicals.<\/p>\n
Read: Bayer Faces Billions in Payouts for Decades-Old Toxic Mess<\/p>\n
\u201cThe lesson of the last decade I\u2019d draw is: there\u2019s always someone in the US who wants to sue Monsanto,\u201d said Berenberg\u2019s Sebastian Bray. \u201cA Supreme Court victory would be a great way of protecting Bayer, but it probably wouldn\u2019t solve absolutely everything.\u201d<\/p>\n
–With assistance from Jef Feeley.<\/p>\n
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