Explanatory Notes

Acquisitions, Divestments and Discontinued Operations

Acquisitions

Bayer acquired 100% of the outstanding shares of Monsanto Company, St. Louis, Missouri, United States (Monsanto) on June 7, 2018. The acquisition of Monsanto brings together two strong and highly complementary businesses: Bayer’s innovative chemical and biological crop protection portfolio and Monsanto’s exceptional expertise in the field of seeds and traits. Bayer is now a leader in the agricultural industry with a clear commitment to innovation and sustainability – for the benefit of its customers and society. In addition to leveraging its employees’ extensive expertise in agriculture, Bayer also has the strongest portfolio of seed and crop protection products for a wide range of crops and indications, the best research and development platform and the leading digital farming business.

Among the production sites maintained by Monsanto are facilities in St. Louis, Luling, Muscatine and Soda Springs (all United States), Antwerp (Belgium), Zarate (Argentina) and Camacari (Brazil). Monsanto’s portfolio of established brands includes DEKALB™, Asgrow™ and Roundup™. The purchase price of €48,029 million pertained mainly to intangible assets for technologies in the areas of seeds and traits (useful lives of between 9 and 30 years), herbicides (useful lives of 20 years) and digital platforms (useful lives of 15 years), as well as for R&D projects, brands (useful lives of between 10 and 30 years), property, plant and equipment, inventories and goodwill. No value was assigned to the company name “Monsanto.”

The goodwill included expected synergies in administration processes and infrastructure, including cost savings in the cost of goods, selling, R&D and general administration functions, as well as expected sales synergies resulting from the combined offering of products. The goodwill is non-tax-deductible.

Monsanto contributed €543 million to sales of the Bayer Group in the second quarter. An after-tax loss of €165 million was recorded for the acquired businesses since the date of first-time consolidation.

The purchase price allocation for Monsanto currently remains incomplete pending compilation and review of the relevant financial information. It is therefore possible that changes will be made in the allocation of the purchase price to the individual assets and liabilities.

In connection with its acquisition of Monsanto, Bayer had to submit a takeover offer for the noncontrolling interest in the company Monsanto India Limited. This offer was published in June. As of June 30, 2018, the noncontrolling interest is presented as a liability due to the offer made.

The following bonds with total nominal volumes of US$15 billion and €5 billion in total were issued in June 2018 to finance the acquisition:

Bonds and Notes

Issuer

 

Coupon (%)

 

Nominal volume

 

Issue date

 

Maturity date

Bayer U.S. Finance II LLC, U.S.A.

 

 

3.5

 

US$1,250 million

 

Jun 25, 2018

 

Jun 25, 2021

 

 

3 month USD LIBOR +0.63

 

US$1,250 million

 

Jun 25, 2018

 

Jun 25, 2021

 

 

3.875

 

US$2,250 million

 

Jun 25, 2018

 

Dec 15, 2023

 

 

3 month USD LIBOR +1.01

 

US$1,250 million

 

Jun 25, 2018

 

Dec 15, 2023

 

 

4.25

 

US$2,500 million

 

Jun 25, 2018

 

Dec 15, 2025

 

 

4.375

 

US$3,500 million

 

Jun 25, 2018

 

Dec 15, 2028

 

 

4.625

 

US$1,000 million

 

Jun 25, 2018

 

Jun 25, 2038

 

 

4.875

 

US$2,000 million

 

Jun 25, 2018

 

Jun 25, 2048

Bayer Capital Corporation B.V., Netherlands

 

 

3 month EURIBOR +0.55

 

€750 million

 

Jun 26, 2018

 

Jun 26, 2022

 

 

0.625

 

€1,000 million

 

Jun 26, 2018

 

Dec 15, 2022

 

 

1.5

 

€1,750 million

 

Jun 26, 2018

 

Jun 26, 2026

 

 

2.125

 

€1,500 million

 

Jun 26, 2018

 

Dec 15, 2029

As part of the acquisition, bonds with a nominal volume of US$6.9 billion were taken over from Monsanto.

On May 2, Bayer increased its interest in the joint venture Bayer Zydus Pharma Private Limited, Thane, India, from 50% to 75% plus one share. A purchase price of €28 million was agreed. Bayer is obligated to purchase the remaining 25% minus one share of Bayer Zydus Pharma by 2021 and has recognized a liability of €9 million in connection with this obligation. As a result, the accounting method used for this business changed from the equity method to full consolidation, with 100% of the shares of Bayer Zydus Pharma being consolidated. Remeasurement of the shares previously accounted for using the equity method resulted in an amount of €18 million. The gain of €15 million resulting from the derecognition of the shares previously accounted for using the equity method was recognized in the financial result. The purchase price pertained mainly to goodwill that in turn was based primarily on a control premium. Bayer Zydus Pharma is active in core segments of the Indian pharmaceutical market and focuses on women’s health, diagnostic imaging, cardiovascular disease, diabetes treatment and oncology. This acquisition increases Bayer’s presence in the Indian pharmaceutical market.

The effects of these transactions on the Group’s assets and liabilities are shown in the table. Net of acquired cash and cash equivalents, they resulted in the following cash outflow:

Acquired Assets, Assumed Liabilities and Adjustments (Fair Values at the Respective Acquisition Dates)

 

 

H1 2018

 

of which Monsanto

 

of which Zydus

 

 

€ million

 

€ million

 

€ million

Goodwill

 

23,046

 

22,998

 

48

Patents and technologies

 

17,350

 

17,350

 

Trademarks

 

4,195

 

4,195

 

Marketing and distribution rights

 

821

 

821

 

R&D projects

 

4,300

 

4,300

 

Other rights

 

394

 

394

 

Property, plant and equipment

 

6,293

 

6,293

 

Investments accounted for using the equity method

 

52

 

52

 

Other financial assets

 

253

 

250

 

3

Inventories

 

4,885

 

4,882

 

3

Receivables

 

7,203

 

7,201

 

2

Other assets

 

27

 

27

 

Cash and cash equivalents

 

2,659

 

2,657

 

2

Deferred tax assets

 

1,550

 

1,548

 

2

Provisions for pensions and other post-employment benefits

 

(367)

 

(367)

 

Other provisions

 

(1,530)

 

(1,529)

 

(1)

Refund liabilities

 

(3,322)

 

(3,321)

 

(1)

Financial liabilities

 

(8,657)

 

(8,656)

 

(1)

Other liabilities

 

(2,872)

 

(2,870)

 

(2)

Deferred tax liabilities

 

(8,019)

 

(8,019)

 

Net assets

 

48,261

 

48,206

 

55

Changes in noncontrolling interest

 

(177)

 

(177)

 

Remeasurement of previously held equity interest and net assets

 

(18)

 

 

(18)

Consideration transferred

 

48,066

 

48,029

 

37

Acquired cash and cash equivalents

 

(2,659)

 

(2,657)

 

(2)

Noncash components

 

(91)

 

(82)

 

(9)

Net cash outflow for acquisitions

 

45,316

 

45,290

 

26

The fair value of the acquired receivables in the amount of €7.2 billion primarily comprises trade accounts receivable. As of the date of the acquisition, the gross amount of the contractual receivables amounted to €7.7 billion, with €0.4 billion of this figure assessed as irrecoverable.

If the aforementioned acquisitions had already been made as of January 1, 2018, the Bayer Group would have had total sales of €25,321 million. Income after income taxes would have been €2,712 million, and earnings per share €2.85. This takes into account significant effects relating to financing costs and purchase price allocations for the half year. In particular, the remeasurement of inventories at fair value and their subsequent utilization as well as planned amortization had a negative impact. In addition, no adjustment for special items is included.

Divestments and discontinued operations

Bayer ceded de facto control of Covestro and deconsolidated the company at the end of September 2017. As of the loss of control, Covestro fulfills the conditions for presentation as a discontinued operation. In connection with the sale of Covestro AG shares in 2017, Bayer AG entered into derivative contracts. These resulted in Bayer AG retaining economic exposure to the price of Covestro AG shares until the second quarter of 2018. In the second quarter of 2018, Bayer recognized an after-tax loss of €8 million from these contracts:

Income Statements for Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

Total

 

 

Q2 2017

Q2 2018

 

Q2 2017

Q2 2018

 

Q2 2017

Q2 2018

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

1

For definition see Bayer Annual Report 2017, Chapter “Alternative Performance Measures Used by the Bayer Group.”

Net sales

 

3,479

 

184

 

3,663

Cost of goods sold

 

(2,336)

 

(7)

 

(2,343)

Gross profit

 

1,143

 

177

 

1,320

Selling expenses

 

(344)

 

(1)

 

(345)

Research and development expenses

 

(68)

 

 

(68)

General administration expenses

 

(115)

 

(3)

 

(118)

Other operating income / expenses

 

72

(2)

 

 

72

(2)

EBIT1

 

688

(2)

 

173

 

861

(2)

Financial result

 

(36)

 

 

(36)

Income before income taxes

 

652

(2)

 

173

 

825

(2)

Income taxes

 

(159)

(6)

 

(25)

 

(184)

(6)

Income after income taxes

 

493

(8)

 

148

 

641

(8)

of which attributable to noncontrolling interest

 

251

 

 

251

of which attributable to Bayer AG stockholders (net income)

 

242

(8)

 

148

 

390

(8)

Income from discontinued operations in the first half of 2018 was as follows:

Income Statements for Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

Total

 

 

H1 2017

H1 2018

 

H1 2017

H1 2018

 

H1 2017

H1 2018

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

1

For definition see Bayer Annual Report 2017, Chapter “Alternative Performance Measures Used by the Bayer Group.”

Net sales

 

7,043

 

312

 

7,355

Cost of goods sold

 

(4,694)

 

(14)

 

(4,708)

Gross profit

 

2,349

 

298

 

2,647

Selling expenses

 

(690)

 

(2)

 

(692)

Research and development expenses

 

(132)

 

 

(132)

General administration expenses

 

(227)

 

(5)

 

(232)

Other operating income / expenses

 

77

8

 

5

 

82

8

EBIT1

 

1,377

8

 

296

 

1,673

8

Financial result

 

(89)

 

 

(89)

Income before income taxes

 

1,288

8

 

296

 

1,584

8

Income taxes

 

(330)

(8)

 

(49)

 

(379)

(8)

Income after income taxes

 

958

0

 

247

 

1,205

0

of which attributable to noncontrolling interest

 

441

0

 

 

441

0

of which attributable to Bayer AG stockholders (net income)

 

517

0

 

247

 

764

0

In the second quarter of 2018, the discontinued operations affected the Bayer Group statement of cash flows as follows:

Statements of Cash Flows for Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

Total

 

 

Q2 2017

Q2 2018

 

Q2 2017

Q2 2018

 

Q2 2017

Q2 2018

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Net cash provided by (used in) operating activities

 

415

 

(3)

 

412

Net cash provided by (used in) investing activities

 

(275)

 

 

(275)

Net cash provided by (used in) financing activities

 

(116)

 

3

 

(113)

Change in cash and cash equivalents

 

24

 

 

24

The effect of discontinued operations on the statements of cash flows in the first half of 2018 was as follows:

Statements of Cash Flows for Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

Total

 

 

H1 2017

H1 2018

 

H1 2017

H1 2018

 

H1 2017

H1 2018

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Net cash provided by (used in) operating activities

 

690

 

12

 

702

Net cash provided by (used in) investing activities

 

(387)

 

 

(387)

Net cash provided by (used in) financing activities

 

(117)

 

(12)

 

(129)

Change in cash and cash equivalents

 

186

 

 

186

As no cash was assigned to the discontinued operation Diabetes Care, the balance of the cash provided is deducted again in financing activities.

Assets held for sale

In connection with the acquisition of Monsanto, Bayer signed an agreement with BASF on October 13, 2017, concerning the sale of selected Crop Science businesses. The businesses to be sold comprised Bayer’s global glufosinate ammonium business and the related LibertyLink™ technology for herbicide tolerance and a substantial part of the field crop seed business, including the related research and development capabilities. The seeds business to be divested included the global cotton seed business (excluding India and South Africa), the North American and European canola seed business, and the soybean seed business.

In this connection, Bayer signed a further agreement with BASF on April 23, 2018, comprising its entire vegetable seeds business, its R&D platform for hybrid wheat, its remaining canola seed business, three research projects in the area of nonselective herbicides, its global digital farming business and business activities in the field of seed treatments.

All of the transactions closed on August 1, 2018, apart from the divestment of the vegetable seed business, which closed on August 16, 2018. The total base purchase price of €7.6 billion before tax is subject to purchase price adjustments typical for such transactions.

In accordance with the conditions imposed by antitrust authorities, the divestment of Crop Science businesses to BASF also comprises further significant obligations by Bayer that will be fulfilled over a number of years subsequent to the date of divestment. Another one of these conditions is for deliveries under the supply agreement (finished products and active ingredients) to be made at prices based on the respective variable costs. The difference between these and customary sales prices will be recognized as deferred income in the statement of financial position, and this will be dissolved as the obligations are fulfilled.

On July 27, 2018, Bayer signed an agreement to divest its prescription dermatology business to LEO Pharma A/S, Ballerup, Denmark. Subject to the satisfaction of customary closing conditions, the business will be transferred on September 4, 2018, for the United States and during the second half of 2019 for all other markets. The portfolio being divested comprises prescription brands including Advantan™, Skinoren™ and Travocort™. The base purchase price amounts to €58 million for the U.S. business and €555 million for the rest of the global business and is subject to customary purchase price adjustments.

The assets and liabilities held for sale are presented below:

Assets and Liabilities Held for Sale

 

 

June 30, 2018

 

 

€ million

Goodwill

 

800

Other intangible assets

 

440

Property, plant and equipment

 

1,384

Other assets

 

456

Deferred taxes

 

163

Inventories

 

447

Cash and cash equivalents

 

30

Assets held for sale

 

3,720

Provisions for pensions and other post-employment benefits

 

40

Other provisions

 

467

Other liabilities

 

107

Deferred taxes

 

55

Liabilities directly related to assets held for sale

 

669

On June 30, 2018, the Pharmaceuticals segment sold its MK Generics business in Central America and the Caribbean to Tecnoquímicas S.A. The divested business includes the Bonima production plant in El Salvador. The base purchase price was €44 million.

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