Scope of Consoli­dation; Sub­sidiaries and Affili­ates

Changes in the scope of consolidation

Changes in the scope of consolidation in 2017 were as follows:

Change in Number of Consolidated Companies

Bayer AG and consolidated companies

 

Germany

 

Other countries

 

Total

December 31, 2016

 

64

 

237

 

301

Changes in scope of consolidation

 

(9)

 

(39)

 

(48)

Retirements

 

(5)

 

(11)

 

(16)

December 31, 2017

 

50

 

187

 

237

The decrease in the total number of consolidated companies in 2017 was primarily due to the deconsolidation of Covestro. Covestro AG has since been accounted for as an associate in the consolidated financial statements.

In conjunction with the acquisition of the consumer care business of Merck & Co., Inc., United States, Bayer entered into a strategic collaboration with that company in 2014. This collaboration is included in the consolidated financial statements as a joint operation. Bayer and Merck & Co., Inc., have mutually agreed to collaborate on the development, production, life-cycle management and marketing of active ingredients and products in the field of soluble guanylate cyclase (sGC) modulation.

Four (2016: five) associates and eight (2016: six) joint ventures were accounted for in the consolidated financial statements using the equity method. Details of these companies are given in Note “Investments accounted for using the equity method”.

Flagship Ventures V Agricultural Fund, L.P., United States, was included in the consolidated financial statements for the first time in 2015 and classified as an associate. Bayer has no control over this associate despite owning 99.9% of the capital, but is able to significantly influence its financial and operating policy decisions.

Bayer Trendlines Ag Innovation Fund, Limited Partnership, Israel, was included in the consolidated financial statements for the first time in 2016 and classified as an associate. Bayer is a limited partner and has no control over this entity due to contractual restrictions, despite owning 100% of the capital.

Nanjing Baijingyu Pharmaceutical Co., Ltd., China, was classified as an associate in view of Bayer’s representation on its executive committee and supervisory board. This enables Bayer to significantly influence its financial and operating policy decisions despite owning only 15% of its voting rights and capital.

A total of 76 (2016: 72) subsidiaries, including one (2016: one) structured entities and 12 (2016: 12) associates or joint ventures that in aggregate are immaterial to the Bayer Group’s financial position and results of operations are neither consolidated nor accounted for using the equity method, but are recognized at cost. The immaterial subsidiaries accounted for less than 0.1% of Group sales, less than 0.2% of equity and less than 0.1% of total assets.

Details of the companies included in the consolidated financial statements, the subsidiary and affiliated companies of the Bayer Group pursuant to Section 313, Paragraph 2 of the German Commercial Code, and a list of domestic subsidiaries that availed themselves in 2017 of certain exemptions granted under Section 264, Paragraph 3, and Section 264b of the German Commercial Code, are included in the audited consolidated financial statements that have been submitted for publication in the electronic version of the Federal Gazette. This information can also be accessed at www.bayer.com/owner17.

Business combinations and other acquisitions

Business combinations and other acquisitions in 2017

The purchase price of the acquisition made in 2017 was €158 million (2016: minus €5 million). The purchase price of the acquired businesses was settled mainly in cash. Goodwill amounted to €51 million (2016: €9 million). It resulted from the following transaction:

On January 3, 2017, Bayer Animal Health acquired the Cydectin™ portfolio in the United States from Boehringer Ingelheim Vetmedica, Inc., St. Joseph, Missouri, United States. The acquisition comprises the CYDECTIN Pour-On, CYDECTIN Injectable and CYDECTIN Oral Drench endectocides for cattle and sheep. The acquisition is intended to strengthen the antiparasitics portfolio in the United States through the addition of endectocides. A purchase price of €158 million was agreed. The purchase price pertained mainly to trademarks and goodwill, which, as expected, is fully tax-deductible.

The effects of this transaction – as of the acquisition date – on the Group’s assets and liabilities in 2017 are shown in the following table. The transaction resulted in the following cash outflow:

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

 

 

2016

 

2017

 

 

€ million

 

€ million

Goodwill

 

9

 

51

Patents and technologies

 

1

 

Trademarks

 

 

85

Production rights

 

 

4

R&D projects

 

(24)

 

Inventories

 

 

18

Provisions for pensions and other post-employment benefits

 

1

 

Deferred tax liabilities

 

8

 

Net assets

 

(5)

 

158

Purchase price

 

(5)

 

158

Net cash (inflow) outflow for acquisitions

 

(5)

 

158

In fiscal 2017, the Cydectin™ business contributed €31 million to the sales of the Bayer Group. After-tax income of €5 million was recorded for the Cydectin™ business from the date of first-time consolidation. This includes the financing costs incurred since the acquisition date.

On September 13, 2017, Bayer and Gingko Bioworks, Inc., Boston, Massachusetts, United States, founded the joint venture Cooksonia Opco LLC, Boston, Massachusetts, United States. The joint venture will focus on technologies to improve plant-associated microbes with a major focus on nitrogen fixation, which is important in agriculture. Capital contribution liabilities of US$70 million to Cooksonia Opco LLC were recognized in the statement of financial position as of December 31, 2017. These liabilities mature on December 31, 2024, at the latest. US$10 million was contributed in 2017.

Planned acquisitions

On September 14, 2016, Bayer signed a definitive merger agreement with Monsanto Company, St. Louis, Missouri, United States, which provides for Bayer’s acquisition of all outstanding shares in Monsanto Company against a cash payment of US$128 per share. At the time this corresponded to an expected transaction volume of approximately US$66 billion, comprising an equity value (purchase price) of approximately US$56 billion and net debt to be assumed in an amount of US$10 billion, which includes pension obligations as of May 31, 2016, as well as liabilities for payments under stock-based compensation programs. Based on Monsanto’s interim report as at November 30, 2017, the transaction value currently amounts to US$62 billion. Bayer thus has a contingent financial commitment in the amount of approximately US$56 billion to acquire Monsanto’s entire outstanding capital stock. The planned transaction has been partially hedged against the euro / U.S. dollar currency risk using derivatives contracts.

The transaction brings together two different, but highly complementary businesses. Monsanto is a leading global provider of agricultural products, including seeds and seed technologies, herbicides, and digital platforms to give farmers agronomic recommendations. The combined business will offer a comprehensive portfolio of seed and crop protection products for a broad range of crops and indications, along with supporting digital farming applications. The combination also brings together both companies’ leading innovation capabilities and R&D technology platforms.

Syndicated bank financing of US$56.9 billion was committed by Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, HSBC and JP Morgan upon the signing of the merger agreement. The credit facility was subsequently syndicated to more than 20 other partner banks of Bayer. Further refinancing of the purchase price is to be achieved through a capital increase, the issuance of bonds and existing liquidity. In November 2016, Bayer successfully placed mandatory convertible notes with a nominal value of €4 billion. The credit facility was reduced by the net proceeds from the mandatory convertible notes in 2016 and by the net proceeds from an exchangeable bond in June 2017. As of December 31, 2017, the credit facility amounts to US$51.5 billion.

The stockholders of Monsanto Company approved the merger with the requisite majority on December 13, 2016. The transaction remains subject to customary closing conditions, including relevant antitrust and other regulatory approvals. With the support of Monsanto, Bayer has initiated the process of obtaining the required regulatory approvals. In 2017, Bayer obtained regulatory approvals in 16 countries.

In connection with this transaction, Bayer reached an agreement with BASF in October 2017 regarding the sale of selected Crop Science businesses. Further information can be found in Note “Divestments, material sale transactions and discontinued operations”.

The merger agreement also provides for payment by Bayer of a US$2 billion reverse break fee, in particular, in the event that the transaction has not been closed at the latest by June 14, 2018, because a necessary antitrust approval has not been granted and Bayer or Monsanto therefore terminates the merger agreement.

Acquisitions in 2016

The following acquisitions and adjustments to purchase price allocations were reported in 2016:

In the course of the global Purchase price allocation (PPA) describes the process of allocating the purchase price into various assets and liabilities when a company is acquired. for SeedWorks India Pvt. Ltd, Hyderabad, India, which was acquired in July 2015, improved information obtained about the acquired assets in the first quarter of 2016 led to decreases of €23 million in intangible assets and €8 million in deferred tax liabilities and a corresponding increase of €13 million in goodwill in the opening statement of financial position. In addition, the purchase price declined by €2 million to €78 million following completion of the final purchase price negotiations.

On February 12, 2016, Bayer and CRISPR Therapeutics AG, Basel, Switzerland, established the joint venture Casebia Therapeutics LLP, Ascot, United Kingdom. Its purpose is the development and commercialization of new methods to treat blood disorders, blindness and heart diseases.

On December 9, 2016, Bayer and Versant Ventures, San Francisco, United States, established the joint venture BlueRock Therapeutics LP, San Francisco, United States. The joint venture will be active in the field of next-generation regenerative medicine. Its goal is to develop induced pluripotent stem cell (iPSC) therapies to cure a range of diseases.

Divestments, material sale transactions and discontinued operations

Divestments in 2017

The effects of divestments in 2017 on the consolidated financial statements were as follows:

In October 2015, Bayer successfully floated the former MaterialScience subgroup on the stock market under the name “Covestro”. In view of the remaining majority interest, Covestro was fully consolidated in the Bayer Group until the end of September 2017.

Following various share sales, the interest held directly by Bayer was reduced to 24.6% by the end of September 2017. The buyers of the approximately 14 million shares sold on September 29, 2017, agreed to be bound by a lock-up arrangement pursuant to which they would not sell the shares they purchased until at least December 11, 2017. Under the contractual agreement, Bayer retained economic exposure to the price of the shares. Bayer Pension Trust holds a further 8.9% of the equity of Covestro AG.

In addition, Bayer and Covestro signed a control termination agreement at the end of September, as part of which Bayer undertakes not to exercise certain voting rights at the Covestro Annual General Meeting. Bayer therefore ceded de facto control of Covestro at the end of September 2017. Accordingly, the Covestro Group was deconsolidated at the end of the third quarter and, in view of Bayer’s remaining significant influence, was recognized for the first time as an associate. Further details of the accounting for the Covestro Group as an associate using the equity method are given in Note “Investments accounted for using the equity method”. Details of share sales are provided in Note “Equity”.

At the end of September, the fair value of the remaining interest, €3.6 billion, was determined on the basis of the share price. The deconsolidation and remeasurement of the remaining interest in Covestro resulted in overall income before taxes of €3.1 billion, which is included in income from discontinued operations. This figure reflects a gain of €2.4 billion from the remeasurement of the remaining interest, a gain of €0.5 billion from the deconsolidation, and a gain of €0.2 billion from the performance of the shares sold on September 29, 2017, in the fourth quarter of 2017. The overall gain after taxes amounted to €3.0 billion. A deferred tax expense of €32 million was accounted for as part of the remeasurement of the remaining interest. In addition, an amount of minus €0.6 billion recognized in other comprehensive income was reclassified to retained earnings attributable to Bayer AG stockholders.

The aforementioned divestment and additional smaller divestments had the following effect in 2017:

Divested Assets and Liabilities

 

 

2016

 

2017

 

 

€ million

 

€ million

Goodwill

 

36

 

254

Patents and technologies

 

4

 

18

Marketing and distribution rights

 

16

 

28

Other rights

 

 

33

Property, plant and equipment

 

 

4,206

Other noncurrent assets

 

 

233

Deferred taxes

 

 

506

Inventories

 

184

 

1,840

Other current assets

 

 

3,005

Assets held for sale

 

 

3

Cash and cash equivalents

 

 

637

Provisions for pensions and other post-employment benefits

 

(28)

 

(1,201)

Other provisions

 

(97)

 

(779)

Financial liabilities

 

 

(1,809)

Other liabilities

 

 

(1,715)

Divested net assets

 

115

 

5,259

Discontinued operations

Following the loss of control, Covestro fulfilled the conditions for presentation as a discontinued operation for all of the periods prior to deconsolidation, including the prior year.

The sale of the Diabetes Care business to Panasonic Healthcare Holdings Co., Ltd., Tokyo, Japan, for approximately €1 billion was completed on January 4, 2016. The sale included the leading Contour™ portfolio of blood glucose meters and strips, other blood glucose monitoring sysems such as Breeze™2 and Elite™, and Microlet™ lancing devices.

The sale of the Diabetes Care business also comprised further significant obligations by Bayer that were fulfilled over a period of up to two years subsequent to the date of divestment. The sale proceeds were recognized accordingly until the end of 2017 and reported as income from discontinued operations. Deferred income was recognized in the statement of financial position and was dissolved as the obligations were fulfilled. Of this, an amount of €462 million was recognized in sales in 2017.

The obligations fulfilled over a period of up to two years after the divestment of the Diabetes Care business are also reported as discontinued operations in the income statement and the statement of cash flows. They resulted in sales of €39 million in 2017.

The items in the statement of financial position pertaining to the Diabetes Care business are shown in the segment reporting under “All Other Segments.” The statement of financial position includes other receivables (net: €3 million), income tax liabilities (€57 million) and miscellaneous provisions (€2 million).

The sale of the Consumer business (CS Consumer) of Bayer’s Environmental Science unit to SBM Développement SAS, Lyon, France, was completed on October 4, 2016. These activities were reported as discontinued operations from the second half of 2016.

The income statements for the discontinued operations are given below:

Income Statements for Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

CS Consumer

 

Total

 

 

2016

2017

 

2016

2017

 

2016

2017

 

2016

2017

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

1

For definition, see Management Report & Annexes, Chapter “Alternative Performance Measures Used by the Bayer Group.”

Net sales

 

11,826

10,556

 

573

501

 

195

 

12,594

11,057

Cost of goods sold

 

(8,539)

(6,973)

 

(146)

(28)

 

(121)

 

(8,806)

(7,001)

Gross profit

 

3,287

3,583

 

427

473

 

74

 

3,788

4,056

Selling expenses

 

(1,326)

(1,016)

 

(9)

(4)

 

(83)

 

(1,418)

(1,020)

Research and development expenses

 

(261)

(200)

 

(1)

 

(11)

 

(273)

(200)

General administration expenses

 

(452)

(345)

 

(12)

(8)

 

(9)

 

(473)

(353)

Other operating income / expenses

 

56

3,150

 

(4)

(3)

 

(55)

 

(3)

3,147

EBIT1

 

1,304

5,172

 

401

458

 

(84)

 

1,621

5,630

Financial result

 

(190)

(124)

 

 

 

(190)

(124)

Income before income taxes

 

1,114

5,048

 

401

458

 

(84)

 

1,431

5,506

Income taxes

 

(312)

(580)

 

(76)

(80)

 

27

 

(361)

(660)

Income after income taxes

 

802

4,468

 

325

378

 

(57)

 

1,070

4,846

of which attributable to noncontrolling interest

 

282

759

 

 

 

282

759

of which attributable to Bayer AG stockholders (net income)

 

520

3,709

 

325

378

 

(57)

 

788

4,087

The cash flows for the discontinued operations are as follows:

Cash Flows from Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

CS Consumer

 

Total

 

 

2016

2017

 

2016

2017

 

2016

2017

 

2016

2017

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Net cash provided by (used in) operating activities

 

1,824

1,473

 

788

50

 

42

 

2,654

1,523

Net cash provided by (used in) investing activities

 

(1,020)

(742)

 

 

 

(1,020)

(742)

Net cash provided by (used in) financing activities

 

1,014

(224)

 

(788)

(50)

 

(42)

 

184

(274)

Change in cash and cash equivalents

 

1,818

507

 

 

 

1,818

507

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

Assets held for sale

In connection with the planned 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 comprise Bayer’s global glufosinate ammonium business and the related LibertyLink™ technology for herbicide tolerance, a substantial part of the Field crops are cultivated plants with life cycles – vegetative development, flowering, ripening and death – lasting one year. Examples include cereals, oilseed rape and sugar beets. seed business, including the related research and development capabilities. The seeds business being divested includes the global cotton seed business (excluding India and South Africa), the North American and European canola seed business, and the soybean seed business. The agreed base purchase price of €5.9 billion excludes the value of any net Working capital is the difference between short-term current assets and short-term liabilities; it is calculated by deducting short-term liabilities from current assets (excluding cash and cash equivalents). In the statement of cash flows, the change in working capital is one of the variables used to assess a company’s financial health. The objective of working capital management is to reduce working capital by minimizing the “financing gap” caused by the time lapse between the disbursement of funds (= payment for necessary raw materials) and the receipt of funds for the finished product. and is subject to the customary adjustment mechanisms.

The transaction is subject to regulatory approvals as well as the successful closing of Bayer’s acquisition of Monsanto. Bayer will continue to own, operate and maintain these businesses until the divestment is concluded.

The assets and liabilities held for sale are presented below:

Assets and Liabilities Held for Sale

 

 

Dec. 31, 2017

 

 

€ million

Goodwill

 

479

Other intangible assets

 

287

Property, plant and equipment

 

1,062

Other receivables

 

41

Deferred taxes

 

63

Inventories

 

149

Assets held for sale

 

2,081

Provisions for pensions and other post-employment benefits

 

11

Other provisions

 

79

Financial liabilities

 

14

Other liabilities

 

4

Deferred taxes

 

3

Liabilities directly related to assets held for sale

 

111

Compare to Last Year