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Acquisition of Schering gives Bayer stock further impetus
Bayer stock continued to appreciate in 2006, posting an overall performance of 18.3 percent. Investor interest focused on the acquisition of Schering. Dividend rises to €1.00 per share.
2006: a volatile stock market year ends on a positive note
The German equity market proved volatile in fiscal 2006. The DAX initially continued on the previous year’s upward path. However, concern about inflation and interest rates in the United States triggered a global market downtrend in May and June, with substantial falls in some stocks. Sound corporate profits and buoyant mergers and acquisitions activity revived investor confidence at the start of the second half and ushered in a new rally. The DAX ended the year up 22.0 percent at 6,597 points.
Performance of Bayer stock exceeds 18 percent
Bayer stock again developed very well, its price gaining 15.2 percent on the year. Including the dividend of €0.95 per share paid in 2006, our stock achieved a performance of 18.3 percent. This was only just below the DAX’s performance but slightly above the Dow Jones EURO STOXX 50SM index, in which Bayer is also included.
During the year the share price was driven mainly by factors relating to our acquisition of Schering, Berlin, Germany. The announcement on March 23, 2006 of our intention to acquire Schering triggered a period of turbulent trading in Bayer stock, with a very high turnover at times. The tide turned in mid-June 2006, when it became increasingly clear that our public takeover offer would succeed, and Bayer shares went on from there to gain over 30 percent by year-end.
A €1.2 billion capital increase as part of the financing of this acquisition raised the number of shares in issue by 34 million to 764.34 million. Market capitalization increased by a total of €5.3 billion (+20.5 percent) on the year, to €31.1 billion.
This capital increase and the effect of the €2.3 billion mandatory convertible bond launched in April 2006 have to be taken into account in calculating earnings per share for fiscal 2006. In computing earnings per share, ordinary shares to be issued when the conversion rights from this bond issue are exercised have to be counted together with already issued shares, so basic and diluted earnings per share are identical. Details on the calculation of earnings per share are given here.
During the year the share price was driven mainly by factors relating to our acquisition of Schering, Berlin, Germany. The announcement on March 23, 2006 of our intention to acquire Schering triggered a period of turbulent trading in Bayer stock, with a very high turnover at times. The tide turned in mid-June 2006, when it became increasingly clear that our public takeover offer would succeed, and Bayer shares went on from there to gain over 30 percent by year-end.
A €1.2 billion capital increase as part of the financing of this acquisition raised the number of shares in issue by 34 million to 764.34 million. Market capitalization increased by a total of €5.3 billion (+20.5 percent) on the year, to €31.1 billion.
This capital increase and the effect of the €2.3 billion mandatory convertible bond launched in April 2006 have to be taken into account in calculating earnings per share for fiscal 2006. In computing earnings per share, ordinary shares to be issued when the conversion rights from this bond issue are exercised have to be counted together with already issued shares, so basic and diluted earnings per share are identical. Details on the calculation of earnings per share are given here.
Performance of Bayer Stock in 2006
| Bayer Stock Data | 2005 | 2006 | |
| Earnings per share | € | 2.19 | 2.22 |
| Core earnings per share1 | € | 2.84 | 3.24 |
| Cash flow per share | € | 4.26 | 5.12 |
| Equity per share | € | 15.28 | 16.81 |
| Dividend per share | € | 0.95 | 1.00 |
| Year-end price2 | € | 35.29 | 40.66 |
| High for the year2 | € | 35.92 | 40.92 |
| Low for the year2 | € | 22.02 | 30.56 |
| Total dividend payment | € million | 694 | 764 |
| Shares entitled to the dividend (Dec. 31) | million | 730.34 | 764.34 |
| Market capitalization (Dec. 31) | € billion | 25.8 | 31.1 |
| Average daily trading volume | million | 4.1 | 5.6 |
| Price/earnings ratio2 | 16.1 | 18.3 | |
| Price/cash flow ratio2 | 8.3 | 7.9 | |
| Dividend yield | % | 2.7 | 2.5 |
1 For details on the calculation of core earnings per share, see Calculation of core earnings per share.
2 XETRA closing prices; Source: Bloomberg
2 XETRA closing prices; Source: Bloomberg
Proposed dividend of €1.00 per share
The Board of Management and Supervisory Board will propose to the Annual Stockholders’ Meeting that the dividend be raised by 5.3 percent to €1.00 per share. The higher per-share amount and the larger number of shares due to the capital increase boost the payout by 10.1 percent to €764 million. The dividend yield calculated on the year-end price amounts to 2.5 percent.
Despite the substantial expenditures for the Schering acquisition, this dividend is intended to ensure that stockholders participate in the success Bayer experienced in 2006 and demonstrate the confidence of the Board of Management and Supervisory Board in the Group’s future development.
Despite the substantial expenditures for the Schering acquisition, this dividend is intended to ensure that stockholders participate in the success Bayer experienced in 2006 and demonstrate the confidence of the Board of Management and Supervisory Board in the Group’s future development.
Debt issues support financing of Schering acquisition
Bayer’s borrowings generally take the form of bond issues under the company’s European Medium Term Notes (EMTN) program. The larger Bayer AG bonds launched under this program are included in the major bond indices in light of their benchmark issue volumes and their liquidity. In addition, the Group issues innovative, separately documented debenture types and U.S. bonds under Rule 144A.
In 2006 Bayer offered investors several attractive issues. As part of the financing package for the Schering acquisition, a €2.3 billion mandatory convertible bond was issued by Bayer Capital Corp. in April 2006 and placed with institutional investors. This subordinated bond, which is guaranteed by Bayer AG, has a coupon of 6.625 %. It was the largest mandatory convertible bond placement in Europe to date. Investors may convert the bond into shares of Bayer AG during the term of the bond, which runs until June 2009. If they have not done so by then, the bond will automatically convert into shares. Because of its structure, the rating agencies Moody’s and Standard & Poor’s treat the mandatory convertible bond entirely as equity and do not regard it as debt for credit rating purposes. For information on Bayer’s credit rating, see section on financial strategy.
In 2006 Bayer offered investors several attractive issues. As part of the financing package for the Schering acquisition, a €2.3 billion mandatory convertible bond was issued by Bayer Capital Corp. in April 2006 and placed with institutional investors. This subordinated bond, which is guaranteed by Bayer AG, has a coupon of 6.625 %. It was the largest mandatory convertible bond placement in Europe to date. Investors may convert the bond into shares of Bayer AG during the term of the bond, which runs until June 2009. If they have not done so by then, the bond will automatically convert into shares. Because of its structure, the rating agencies Moody’s and Standard & Poor’s treat the mandatory convertible bond entirely as equity and do not regard it as debt for credit rating purposes. For information on Bayer’s credit rating, see section on financial strategy.
Dividends
In May 2006 Bayer AG issued three bonds under its EMTN program, again to help finance the acquisition of Schering. The first is a three-year floating rate note in a nominal amount of €1.6 billion which bears interest at 0.225 percent above the 3-month Euribor rate. The second is a €1 billion issue with a seven-year term and a coupon of 4.5 percent. The third, a sterling (GBP) issue, has a coupon of 5.625 percent and a maturity of 13 years. In December 2006 Bayer utilized the very favorable capital market conditions to increase this issue by GBP 100 million to a total of GBP 350 million, giving Bayer’s first-ever sterling bond benchmark volume and appealing to investors in a further currency zone. The issue was fully swapped into euros.
The hybrid bond in the nominal amount of €1.3 billion issued in 2005 was reclassified by Standard & Poor’s as a result of a change to that agency’s rating methodology. In computing debt indicators, S & P now treats 50 percent of this issue as equity and 50 percent as debt. Moody’s continues to treat 75 percent as equity.
The hybrid bond in the nominal amount of €1.3 billion issued in 2005 was reclassified by Standard & Poor’s as a result of a change to that agency’s rating methodology. In computing debt indicators, S & P now treats 50 percent of this issue as equity and 50 percent as debt. Moody’s continues to treat 75 percent as equity.
Investor relations activities focus on the acquisition
Investors’ interest in 2006 centered on the acquisition of Schering. Bayer’s management and investor relations team met with analysts and investors at roadshows and investor conferences on nearly 60 days.
The principal topics addressed at these meetings, apart from the strategic reasons for acquiring Schering, were the late-stage projects in Bayer’s pharmaceuticals development pipeline, the restructuring of CropScience, trends on the polymers markets and the impact of the Schering acquisition on Bayer’s credit rating.
An innovative conference format entitled “Meet Management,” which was introduced in May, proved especially attractive. Representatives of the investment community were invited to Leverkusen for intensive small-group discussions with members of the management boards of our holding company and subgroups about the performance of the Bayer Group and its subsidiaries.
We also set up a hotline on the Schering acquisition to give private investors full and timely information on matters relating to the tender of their shares. The Internet was used as an additional information channel, particularly to reach individual stockholders. Wherever practicable, all conference calls and meetings are streamed live on the Internet to ensure their accessibility to all interested parties.
The principal topics addressed at these meetings, apart from the strategic reasons for acquiring Schering, were the late-stage projects in Bayer’s pharmaceuticals development pipeline, the restructuring of CropScience, trends on the polymers markets and the impact of the Schering acquisition on Bayer’s credit rating.
An innovative conference format entitled “Meet Management,” which was introduced in May, proved especially attractive. Representatives of the investment community were invited to Leverkusen for intensive small-group discussions with members of the management boards of our holding company and subgroups about the performance of the Bayer Group and its subsidiaries.
We also set up a hotline on the Schering acquisition to give private investors full and timely information on matters relating to the tender of their shares. The Internet was used as an additional information channel, particularly to reach individual stockholders. Wherever practicable, all conference calls and meetings are streamed live on the Internet to ensure their accessibility to all interested parties.
Earnings per share according to IFRS are affected by the purchase price allocation [7.2] and other special factors. To enhance comparability, we also determine core net income from continuing operations after elimination of the amortization of intangible assets, asset write-downs (including any impairment losses), special items in EBITDA and extraordinary factors affecting income from investments in affiliated companies (such as divestment gains or write-downs), including the related tax effects.
The calculation of earnings per share in accordance with IFRS is explained in the notes to the financial statements [16]. Adjusted core net income, core earnings per share and core EBIT are not defined in the International Financial Reporting Standards. Therefore they should be regarded as supplementary information rather than stand-alone indicators.
The calculation of earnings per share in accordance with IFRS is explained in the notes to the financial statements [16]. Adjusted core net income, core earnings per share and core EBIT are not defined in the International Financial Reporting Standards. Therefore they should be regarded as supplementary information rather than stand-alone indicators.
| Calculation of Core EBIT and Core Earnings per Share | 2005 | 2006 | |
| € million | |||
| EBIT as per income statement | 2,514 | 2,762 | |
| Amortization and write-downs of intangible assets | 550 | 734 | |
| Write-downs of property, plant and equipment | 55 | 107 | |
| Special items (other than write-downs) | 480 | 909 | |
| Core EBIT | 3,599 | 4,512 | |
| Non-operating result (as per income statement) | (602) | (782) | |
| Extraordinary income/loss from investments in affiliated companies | - | (236) | |
| Income taxes (as per income statement) | (538) | (454) | |
| Tax adjustment | (386) | (531) | |
| Income after taxes attributable to minority interest (as per income statement) | 2 | (12) | |
| Core net income from continuing operations | 2,075 | 2,497 | |
| Financing expenses for the mandatory convertible bond, net of tax effects | - | 72 | |
| Adjusted core net income | 2,075 | 2,569 | |
| Shares | |||
| Weighted average number of issued ordinary shares* | 730,341,920 | 746,456,988 | |
| Potential shares to be issued upon conversion of the mandatory convertible bond | - | 45,300,595 | |
| Adjusted weighted average total number of issued and potential ordinary shares | 730,341,920 | 791,757,583 | |
| Core earnings per share from continuing operations (€) | 2.84 | 3.24 | |
* including new shares from the capital increase on a pro-rated basis
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