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. Among the production sites maintained by Monsanto are facilities in 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™, among others. 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 and 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.

Sales of €2,758 million and an after-tax loss of €627 million were 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.

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:

Newly issued bonds

Issuer

 

Coupon (%)

 

Nominal volume

 

Issue date

 

Maturity date

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

 

 

3.5

 

US$ 1,250 million

 

June 25, 2018

 

June 25, 2021

 

 

3 month USD LIBOR +0.63

 

US$ 1,250 million

 

June 25, 2018

 

June 25, 2021

 

 

3.875

 

US$ 2,250 million

 

June 25, 2018

 

Dec. 15, 2023

 

 

3 month USD LIBOR +1.01

 

US$ 1,250 million

 

June 25, 2018

 

Dec. 15, 2023

 

 

4.25

 

US$ 2,500 million

 

June 25, 2018

 

Dec. 15, 2025

 

 

4.375

 

US$ 3,500 million

 

June 25, 2018

 

Dec. 15, 2028

 

 

4.625

 

US$ 1,000 million

 

June 25, 2018

 

June 25, 2038

 

 

4.875

 

US$ 2,000 million

 

June 25, 2018

 

Jun. 25, 2048

Bayer Capital Corporation B.V., Netherlands

 

 

3 month EURIBOR +0.55

 

€750 million

 

June 26, 2018

 

June 26, 2022

 

 

0.625

 

€1,000 million

 

June 26, 2018

 

Dec. 15, 2022

 

 

1.5

 

€1,750 million

 

June 26, 2018

 

June 26, 2026

 

 

2.125

 

€1,500 million

 

June 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, 2018, 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. 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)

 

 

9M 2018

 

of which Monsanto

 

of which Zydus

 

 

€ million

 

€ million

 

€ million

Goodwill

 

23,027

 

22,979

 

48

Patents and technologies

 

17,366

 

17,366

 

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

 

26

 

26

 

Cash and cash equivalents

 

2,659

 

2,657

 

2

Deferred tax assets

 

1,564

 

1,562

 

2

Provisions for pensions and other post-employment benefits

 

(367)

 

(367)

 

Other provisions

 

(1,536)

 

(1,535)

 

(1)

Refund liabilities

 

(3,322)

 

(3,321)

 

(1)

Financial liabilities

 

(8,657)

 

(8,656)

 

(1)

Other liabilities

 

(2,873)

 

(2,871)

 

(2)

Deferred tax liabilities

 

(8,022)

 

(8,022)

 

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

There were adjustments to the purchase price allocation for Monsanto in the third quarter of 2018 that primarily related to goodwill (€19 million).

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 €35,226 million. Income after income taxes would have been €5,778 million, and earnings per share €6.23. This takes into account significant effects relating to financing costs and purchase price allocations for the first nine months of the 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 exchange gains of €8 million through the second quarter of 2018.

Income Statements for Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

Total

 

 

Q3 2017

Q3 2018

 

Q3 2017

Q3 2018

 

Q3 2017

Q3 2018

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

1

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

Net sales

 

3,513

 

137

 

3,650

Cost of goods sold

 

(2,279)

 

(8)

 

(2,287)

Gross profit

 

1,234

 

129

 

1,363

Selling expenses

 

(326)

 

(1)

 

(327)

Research and development expenses

 

(68)

 

 

(68)

General administration expenses

 

(118)

 

(3)

 

(121)

Other operating income / expenses

 

2,886

 

1

 

2,887

EBIT1

 

3,608

 

126

 

3,734

Financial result

 

(36)

 

 

(36)

Income before income taxes

 

3,572

 

126

 

3,698

Income taxes

 

(255)

 

(20)

 

(275)

Income after income taxes

 

3,317

 

106

 

3,423

of which attributable to noncontrolling interest

 

318

 

 

318

of which attributable to Bayer AG stockholders (net income)

 

2,999

 

106

 

3,105

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

Income Statements for Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

Total

 

 

9M 2017

9M 2018

 

9M 2017

9M 2018

 

9M 2017

9M 2018

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

1

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

Net sales

 

10,556

 

449

 

11,005

Cost of goods sold

 

(6,973)

 

(22)

 

(6,995)

Gross profit

 

3,583

 

427

 

4,010

Selling expenses

 

(1,016)

 

(3)

 

(1,019)

Research and development expenses

 

(200)

 

 

(200)

General administration expenses

 

(345)

 

(7)

 

(352)

Other operating income / expenses

 

2,963

8

 

4

 

2,967

8

EBIT1

 

4,985

8

 

421

 

5,406

8

Financial result

 

(124)

 

 

(124)

Income before income taxes

 

4,861

8

 

421

 

5,282

8

Income taxes

 

(585)

(8)

 

(69)

 

(654)

(8)

Income after income taxes

 

4,276

0

 

352

 

4,628

0

of which attributable to noncontrolling interest

 

759

0

 

 

759

0

of which attributable to Bayer AG stockholders (net income)

 

3,517

0

 

352

 

3,869

0

In the third quarter of 2018, discontinued operations had no impact on the Bayer Group statement of cash flows, as illustrated in the following table:

Statements of Cash Flows for Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

Total

 

 

Q3 2017

Q3 2018

 

Q3 2017

Q3 2018

 

Q3 2017

Q3 2018

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Net cash provided by (used in) operating activities

 

783

 

25

 

808

Net cash provided by (used in) investing activities

 

(355)

 

 

(355)

Net cash provided by (used in) financing activities

 

(107)

 

(25)

 

(132)

Change in cash and cash equivalents

 

321

 

 

321

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

Statements of Cash Flows for Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

Total

 

 

9M 2017

9M 2018

 

9M 2017

9M 2018

 

9M 2017

9M 2018

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Net cash provided by (used in) operating activities

 

1,473

 

37

 

1,510

Net cash provided by (used in) investing activities

 

(742)

 

 

(742)

Net cash provided by (used in) financing activities

 

(224)

 

(37)

 

(261)

Change in cash and cash equivalents

 

507

 

 

507

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

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. All of the transactions closed on August 1, 2018, apart from the divestment of the vegetable seed business, which closed on August 16, 2018. 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 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. In this connection, a contract liability of €0.3 billion was determined based on customary sales prices and recognized in the statement of financial position. It will be dissolved as the obligations are fulfilled.

The preliminary purchase price paid amounts to approximately €7.3 billion, and income before taxes to €3.9 billion.

On September 4, 2018, the U.S. activities of the Consumer Health prescription dermatology business were transferred to the acquirer LEO Pharma A/S, Ballerup, Denmark. The base purchase price amounted to €58 million.

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.

Assets held for sale

Bayer signed an agreement on July 27, 2018, to divest the Consumer Health prescription dermatology business to LEO Pharma A/S, Ballerup, Denmark. The global prescription dermatology business excluding the U.S. activities is expected to be transferred to LEO Pharma A/S in the second half of 2019 subject to the fulfillment of the closing conditions. The portfolio being divested comprises prescription brands including Advantan™, Skinoren™ and Travocort™. The base purchase price amounts to €555 million and is subject to customary purchase price adjustments.

The assets and liabilities held for sale are presented below:

Assets and Liabilities Held for Sale

 

 

Sep. 30, 2018

 

 

€ million

Goodwill

 

156

Other intangible assets

 

33

Property, plant and equipment

 

42

Other assets

 

4

Assets held for sale

 

235

Provisions for pensions and other post-employment benefits

 

5

Deferred taxes

 

7

Liabilities directly related to assets held for sale

 

12

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