Bayer beware

Bayer weakens itself via mistimed plastics IPO

Shareholders in Bayer are paying a price for their management's impatience. By pushing through the Frankfurt listing of its plastics unit Covestro in adverse market conditions, the German chemicals and drugs conglomerate has surrendered 320 million euros. It should, and could, have waited.

Several factors conspired against Bayer, which is keen to become focused on drugmaking. The turmoil surrounding Volkswagen and growing concern about the Chinese economy had dented investor sentiment for a global, cyclical company that sells to carmakers, the construction industry and the IT sector. The 30 per cent slide of US peer Huntsman following a profit warning didn't help.

To find buyers, the German group had to shave a quarter off the Covestro offer price. At the midpoint, the plastics arm is now worth 7.1 billion euros including debt, rather than 9.3 billion euros. At just six times last year's Ebitda, Covestro is 10 per cent cheaper than Evonik and 20 per cent cheaper than BASF, Starmine data shows.

Bayer has contained the financial damage by reducing the number of shares issued by a fifth, cutting the IPO size by 40 percent to 1.5 billion euros. The proceeds will be used to reduce Covestro's portion of Bayer's group debt. At the same time, keeping the new company's leverage constant means Bayer will hand over an additional 1 billion euros in equity to Covestro. As it continues to own two-thirds, the effective financial drain will be about 320 million euros.

Bayer, a 95 billion euro company, can afford it. But it still did not have to. For decades, plastics was part of its identity and it did not prevent Bayer's success in drugmaking. Moreover, the group had over-invested in Covestro in the recent past, meaning the unit sits on ample spare capacity and doesn't need major capital expenditure in coming years. If demand for plastics outgrows GDP, as market researchers predict, Covestro's growth and profit will improve over time.

If so, it will lift the share price, allowing Bayer to offload its remaining stake at better prices. But the large share overhang as well as the relatively small free float may hobble Covestro's performance. Bayer's impatience to reinvent its future has got in the way of shareholder interests right now.