14 May 2019 by jbchevrel
Bayer AG (BAYNGR) has lost the 3rd Glyphosate trial with a jury in California unanimously awarding damages of $2B (punitive damages of $1B each - married couple, both with cancer after using the sadly famous weedkiller Roundup for about 30 years). While the stock was hit up to -5% (close -2% after reaching its lowest level in 7 years) the 5y CDS was just wider by +2bp (vs Main tighter by -2.8bp). In cash space, 3% 21s dipped 25c. In March, the outcome of the 2nd trial had caused +25bp on the 5y CDS, so it is notable that the outcome of this 3rd trial was not in appearance surprising for markets. But the amount of damages awarded is significantly higher than witnessed in the previous cases ($80M for both). It is worth noting that BAYNGR has previously seen a Californian court award $289M against them, although this figure was later reduced to $78M on appeal, so there is potential for downside on this $2B. BAYNGR’s approach is now to contest and appeal all cases, they probably hope that appeals can give a different verdict/compensation amount as they are decided by a judge and not by a jury. There are 4 more cases pending this year and the appeal decision will be towards the end of the year, in particular the upcoming Hall vs. Monsanto trial (June 3rd – will be the first one out of California). On the stock, a DCF & SOTP valuation range implies more than €30B legal risk. On the CDS, at 100bp, the spread is reflecting downgrades, from the current BBB s /Baa1 n, as the German name is now wider than some IG names rated BBB-/Baa3, on the brink of junk. Separately, BAYNGR has announced the sale of Coppertone to Beiersdorf for a purchase price of $550M, which is expected to close in Q3-2019. Coppertone brand’s sales last year were about $213M, so that’s on a 2.6x multiple, quite close to the expectation. So this arguably didn’t move the price much. The other consumer brand Dr Scholl’s could also be divested for 2.6x sales. Other potential catalysts include US/China trade tensions and French dossier revelations, the former having been the main macro price action driver over the past sessions. Elsewhere, the market reverted from yesterday’s risk-off session, with iTraxx Main tighter -2.8bp, Xover -9.3bp.