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Temasek loses at least S$1.2b in 5 months for betting on Bayer

It was reported in Apr this year that German drugmaker Bayer sold 3.6 per cent stake to Singapore's Temasek Holdings for 3 billion euros at 96.77 euros per share.

The money is used as part of Bayer's plan in a $62.5 billion takeover of seed maker Monsanto. Together with its existing holding in Bayer, Temasek would own about 4 percent in Bayer after the transaction.

"This investment affirms our business strategy including the proposed acquisition of Monsanto, as well as Bayer’s strong growth prospects," said Bayer.

Bayer would also be issuing rights issue thereafter to fund the Monsanto takeover, which means Temasek may end up buying more Bayer shares.

By Jun, with Temasek's help, Bayer successfully acquired Monsanto to become the biggest seed and agricultural chemical maker in the world. The combined unit will be based in Monheim, Germany, while the North American business and seeds division will be led from St. Louis.

To soothe regulators’ concerns about whether enough competitors would remain in the market, Bayer agreed to sell about 7.6 billion euros in assets to BASF. They include field seeds as well as Bayer’s vegetable-seeds business, some seed treatments and digital farming projects.

Bombshell from Monsanto court case

Last month (10 Aug), in a California court, the jury ruled against Monsanto and decided that its weed killer, "Roundup", has caused cancer in a former school groundskeeper, Mr Lee Johnson.

Working for a school district in California, Mr Johnson mixed and sprayed hundreds of gallons of "Roundup". He was diagnosed with cancer in 2014, and in July 2017, after chemotherapy and other treatments, his oncologist gave him six months to live. His lawyers, relying on his testimony and expert witnesses, argued that his exposure, including accidents that got him soaked from head to toe in Roundup, had caused his non-Hodgkin’s lymphoma.

Mr Johnson's lawyers added that Monsanto scientists actually knew of the cancer risk posed by Roundup as far back as the 1970s, but failed to inform the public and instead engaged in a "deliberate effort to distort the truth” as the weed killer generated hefty returns. Also, they asserted that Monsanto knew that testing of the weed killer was insufficient, and that employees “ghostwrote” favorable scientific articles and paid outside scientists to publish the articles under their names.

But Monsanto's lawyers argued that the short period between Mr Johnson’s first exposure in 2012 and his diagnosis in 2014 made any connection between his contact and the disease impossible. They told the jury that no one has yet figured out what causes non-Hodgkin’s lymphoma.

In any case, the jury awarded damages of US$289 million to Mr Johnson - US$39 million for his losses and US$250 million to punish the Monsanto after finding it liable for a design defect and failing to warn consumers of its herbicide risks. Monsanto said it will appeal.

More than 5,000 pending cases going against Monsanto

The trial was an important test of the evidence against Monsanto and will serve as a template for litigating at least 5,000 more claims over the herbicide, "Roundup". The company continued to maintain that its herbicide did not cause Mr Johnson's cancer.

A Bloomberg analyst said that if the litigation generates more verdicts against Monsanto, it could have a material impact on Bayer’s bottom line. Since "Roundup" is ubiquitous in modern farming, there’s a huge potential liability against Bayer.

The analyst also think that Bayer investors might not be aware of the risks because many analysts covering the company focus on pharmaceuticals.

Glyphosate, the main ingredient in "Roundup", was first approved for use in Monsanto’s weed killer in 1974. While becoming the world’s most popular and widely used herbicide, the question of whether it causes cancer has been hotly debated by environmentalists, regulators, researchers and lawyers.

"We are proud that an independent jury followed the evidence and used its voice to send a message to Monsanto that its years of deception regarding Roundup is over and that they should put consumer safety first over profits,” Mr Johnson's lawyers said after the verdict was announced.

Bayer's share price drops considerably

Bayer's shares immediately fell sharply on the Monday (13 Aug) following the verdict in California on Friday (10 Aug), but Bayer declined to comment on any potential liabilities.

Bayer shares on 13 Aug (the first trading day after the verdict announcement from California) closed at a nearly 5-year low, falling 10% to 83.73 euros.

As at yesterday's closing (14 Sep), Bayer's shares fell further trading at 71.82 euros:

Since Temasek bought 3 billion euros worth of shares at 96.77 euros in Apr, that means it has lost 24.95 euros per share or 25.8% of the 3 billion euros investment. So, in 5 months, Temasek has lost 774 million euros or S$1.2 billion. This does not include any rights issue which Temasek might have dumped further money into Bayer.

Analysts at Barclays said the California court verdict is “likely to create a litigious headache for Bayer”.

The next trial involving Roundup, also a state case, is scheduled to begin in October in St. Louis. Dates for lawsuits in federal courts have yet to be set.

Sales of "Roundup" make up the bulk of Monsanto’s agricultural productivity division, which generated US$3.7 billion in sales last year - about 25 per cent of Monsanto’s total revenue.

In any case, it's not known if Temasek people knew about the US court cases of Monsanto when they decided to invest in Bayer and back Bayer to acquire Monsanto. Even if they did, they must have thought that Monsanto is sure to win in all the court cases in US - a very easy assumption to make since those Temasek fund managers are not gambling with their own money anyway.