Bayer Cuts Chemicals Unit Loose

Shares in Bayer AG surged seven percent on Friday after several German newspapers reported plans by the struggling chemical and pharmaceutical giant to offload its chemicals unit, breaking up its traditional four-pillar strategy encompassing healthcare, polymers, chemicals and agrochemicals.

End of an era

The news came after Bayer’s supervisory board met to discuss a restructuring of the company. According to the German news weekly Der Spiegel, it’s the end of an era. The supervisory board decided to spin off its chemicals unit and parts of the polymers business to form a new company with sales of approximately €5.6 billion and a workforce of about 20,000 employees. Bayer plans to list the company on the stock market under a new name by early 2005 at the latest.

Bayer’s CEO Werner Wenning said the split would benefit both Bayer as well as the new chemicals company, provisionally called NewCo.

"Following the separation, Bayer – with sales of around

€22 billion – will be able to focus more closely on the core businesses in which we have excellent technologies, strong market positions and above all growth areas that we intend to further strengthen by pooling all our resources,” Wenning said.

“In this way, we aim to safeguard the success of our company in the long term and generate additional value. Bayer's reorganization was a key requirement for this significant step.”

Chemicals a weak spot

Industry analysts had long identified the chemicals unit as the weak link for Bayer in terms of profitability. The chemicals unit had sales of €3.3 billion last year, barely 10 percent of the company’s total sales of €29.6 billion.

Investors appear to agree with the supervisory board’s assessment that the split will put NewCo in a more competitive position, allowing it to seek partners or investors at its discretion. The 7.3 percent stock gain on Friday to €22.61 ($25.78) after the announcement made Bayer the biggest gainer on the benchmark DAX index.

Some analysts said the split was overdue, as the chemicals business has different cost structures and prices from Bayer’s core businesses.

Core competencies

The company’s new realignment also includes repositioning the pharmaceuticals division as a mid-size European business on a stand-alone basis within Bayer HealthCare AG.

Wenning said the decision was made because the options for partnering the pharmaceuticals division with other companies didn’t look profitable.

“We therefore intend to focus on our own strengths and steer our pharmaceuticals division with significantly modified structures towards a successful future,” Wenning explained, adding that the company intends to concentrate its research on areas where it already plays a leading role.

Wenning said Bayer has already developed successful products in the therapeutic fields such as anti-infectives, cardiovascular (including treatments for diabetes and obesity) and urology.