Scope of Consolidation; Subsidiaries and Affiliates

Changes in the scope of consolidation

Changes in the scope of consolidation in 2018 were as follows:

Change in Number of Consolidated Companies

Bayer AG and consolidated companies

 

Germany

 

Other countries

 

Total

December 31, 2017

 

50

 

187

 

237

Changes in scope of consolidation

 

+4

 

+2

 

+6

Additions

 

+2

 

+194

 

+196

Retirements

 

–1

 

–18

 

–19

December 31, 2018

 

55

 

365

 

420

The increase in the total number of consolidated companies in 2018 was primarily due to the acquisition of the Monsanto Group.

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.

Five (2017: four) associates and ten (2017: eight) 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.

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 67 (2017: 76) subsidiaries, including one (2017: one) structured entity and 17 (2017: 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 fair value. The immaterial subsidiaries accounted for less than 0.2% 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 2018 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/shareownership2018.

Business combinations and other acquisitions

Business combinations and other acquisitions in 2018

The purchase price of the acquisitions made in 2018 was €48,066 million (2017: €158 million). The purchase price of the acquired businesses was settled mainly in cash. Goodwill amounted to €24,503 million (2017: €51 million).

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 between 5 and 20 years) and digital platforms (useful lives of 15 years), as well as for research and development projects, brands (useful lives of between 10 and 30 years), customer relationships (useful lives of between 20 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 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 €5,328 million and an after-tax loss of €1,341 million were recorded for the acquired businesses since the date of first-time consolidation.

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

 

Jun. 25, 2018

 

Jun. 25, 2021

 

 

3-month USD LIBOR +0.63

 

US$1,250 million

 

Jun. 25, 2018

 

Jun. 25, 2021

 

 

3.875

 

US$2,250 million

 

Jun. 25, 2018

 

Dec. 15, 2023

 

 

3-month USD LIBOR +1.01

 

US$1,250 million

 

Jun. 25, 2018

 

Dec. 15, 2023

 

 

4.25

 

US$2,500 million

 

Jun. 25, 2018

 

Dec. 15, 2025

 

 

4.375

 

US$3,500 million

 

Jun. 25, 2018

 

Dec. 15, 2028

 

 

4.625

 

US$1,000 million

 

Jun. 25, 2018

 

Jun. 25, 2038

 

 

4.875

 

US$2,000 million

 

Jun. 25, 2018

 

Jun. 25, 2048

Bayer Capital Corporation B.V., Netherlands

 

 

3-month EURIBOR +0.55

 

€750 million

 

Jun. 26, 2018

 

Jun. 26, 2022

 

 

0.625

 

€1,000 million

 

Jun. 26, 2018

 

Dec. 15, 2022

 

 

1.5

 

€1,750 million

 

Jun. 26, 2018

 

Jun. 26, 2026

 

 

2.125

 

€1,500 million

 

Jun. 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.

The purchase price allocation of the Monsanto acquisition was adjusted as of December 31, 2018, resulting in a €1,457 million net reduction in acquired assets / increase in assumed liabilities and a corresponding increase in goodwill in the statement of financial position as compared with the amounts recognized in June 2018.

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. 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 and the adjustment of the purchase price allocation of the Monsanto acquisition 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 and Assumed Liabilities (Fair Values at the Respective Acquisition Dates)

 

 

2017

 

2018

 

Of which Zydus

 

Of which Monsanto June 30, 2018

 

Adjustment of purchase price allocation

 

Of which Monsanto December 31, 2018

 

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

Goodwill

 

51

 

24,503

 

48

 

22,998

 

1,457

 

24,455

Patents and technologies

 

 

17,152

 

 

17,350

 

(198)

 

17,152

Trademarks

 

85

 

3,941

 

 

4,195

 

(254)

 

3,941

Marketing and distribution rights

 

 

845

 

 

821

 

24

 

845

R&D projects

 

 

4,637

 

 

4,300

 

337

 

4,637

Production rights

 

4

 

11

 

 

 

11

 

11

Other rights

 

 

360

 

 

394

 

(34)

 

360

Property, plant and equipment

 

 

5,655

 

 

6,293

 

(638)

 

5,655

Investments accounted for using the equity method

 

 

52

 

 

52

 

 

52

Other financial assets

 

 

201

 

3

 

250

 

(52)

 

198

Inventories

 

18

 

4,821

 

3

 

4,882

 

(64)

 

4,818

Receivables

 

 

7,281

 

2

 

7,201

 

78

 

7,279

Other current assets

 

 

27

 

 

27

 

 

 

27

Cash and cash equivalents

 

 

2,659

 

2

 

2,657

 

 

2,657

Deferred tax assets

 

 

1,799

 

2

 

1,548

 

249

 

1,797

Provisions for pensions and other post-employment benefits

 

 

(389)

 

 

(367)

 

(22)

 

(389)

Other provisions

 

 

(2,597)

 

(1)

 

(1,529)

 

(1,067)

 

(2,596)

Refund liabilities

 

 

(3,322)

 

(1)

 

(3,321)

 

 

(3,321)

Financial liabilities

 

 

(8,657)

 

(1)

 

(8,656)

 

 

(8,656)

Other liabilities

 

 

(2,860)

 

(2)

 

(2,870)

 

12

 

(2,858)

Deferred tax liabilities

 

 

(7,858)

 

 

(8,019)

 

161

 

(7,858)

Net assets

 

158

 

48,261

 

55

 

48,206

 

 

48,206

Changes in noncontrolling interest

 

 

(177)

 

 

(177)

 

 

(177)

Remeasurement of previously held equity interest

 

 

(18)

 

(18)

 

 

 

Consideration transferred

 

158

 

48,066

 

37

 

48,029

 

 

48,029

Acquired cash and cash equivalents

 

 

(2,659)

 

(2)

 

(2,657)

 

 

(2,657)

Noncash components

 

 

(91)

 

(9)

 

(82)

 

 

(82)

Net cash (inflow from) outflow for acquisitions

 

158

 

45,316

 

26

 

45,290

 

 

45,290

The fair value of the acquired receivables in the amount of €7.3 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 €0.3 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 €46,289 million. Income after income taxes would have been €2,093 million, and earnings per share €2.22. This takes into account significant effects relating to financing costs and purchase price allocations for 2018. In particular, the remeasurement of inventories at fair value and their subsequent utilization as well as planned amortization had a negative impact. No adjustment was made for special items.

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.

Acquisitions in 2017

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.

On September 13, 2017, Bayer and Gingko Bioworks, Inc., Boston, Massachusetts, United States, founded the joint venture Joyn Bio 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.

Divestments, material sale transactions and discontinued operations

Divestments in 2018

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 €0.2 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 final purchase price provisionally amounts to approximately €7.4 billion, and income before taxes to €4.1 billion. The divested net assets amounted to €2.8 billion and pertained mainly to property, plant and equipment, goodwill and other assets and provisions.

On September 4, 2018, the U.S. activities of the prescription dermatology business within the Consumer Health segment were transferred to the acquirer LEO Pharma A/S, Ballerup, Denmark. The base purchase price amounted to €58 million. The global prescription dermatology business outside the United States is recognized as held for sale.

On June 30, 2018, the Pharmaceuticals segment sold its MK Generics business in Central America and the Caribbean to Tecnoquímicas S.A., Cali, Colombia. The divested business includes the Bonima production plant in El Salvador. The base purchase price was €44 million.

Divestments in 2017

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. Bayer ceded de facto control of Covestro on September 30, 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.

As of September 30, 2017, 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.

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.

The income statements for the discontinued operations are given below:

Income Statements for Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

Total

 

 

2017

2018

 

2017

2018

 

2017

2018

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

1

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

Net sales

 

10,556

 

501

 

11,057

Cost of goods sold

 

(6,973)

 

(28)

 

(7,001)

Gross profit

 

3,583

 

473

 

4,056

Selling expenses

 

(1,016)

 

(4)

 

(1,020)

Research and development expenses

 

(200)

 

 

(200)

General administration expenses

 

(345)

 

(8)

 

(353)

Other operating income / expenses

 

3,150

8

 

(3)

 

3,147

8

EBIT1

 

5,172

8

 

458

 

5,630

8

Financial result

 

(124)

 

 

(124)

Income before income taxes

 

5,048

8

 

458

 

5,506

8

Income taxes

 

(580)

(8)

 

(80)

 

(660)

(8)

Income after income taxes

 

4,468

 

378

 

4,846

of which attributable to noncontrolling interest

 

759

 

 

759

of which attributable to Bayer AG stockholders (net income)

 

3,709

 

378

 

4,087

The cash flows for the discontinued operations are as follows:

Cash Flows from Discontinued Operations

 

 

Covestro

 

Diabetes Care

 

Total

 

 

2017

2018

 

2017

2018

 

2017

2018

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Net cash provided by (used in) operating activities

 

1,473

 

50

 

1,523

Net cash provided by (used in) investing activities

 

(742)

 

 

(742)

Net cash provided by (used in) financing activities

 

(224)

 

(50)

 

(274)

Change in cash and cash equivalents

 

507

 

 

507

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

 

 

Dec. 31, 2017

 

Dec. 31, 2018

 

 

€ million

 

€ million

Goodwill

 

479

 

156

Other intangible assets

 

287

 

32

Property, plant and equipment

 

1,062

 

42

Other assets

 

41

 

4

Deferred taxes

 

63

 

Inventories

 

149

 

Assets held for sale

 

2,081

 

234

Provisions for pensions and other post-employment benefits

 

11

 

5

Other provisions

 

79

 

Financial liabilities

 

14

 

Other liabilities

 

4

 

Deferred taxes

 

3

 

7

Liabilities directly related to assets held for sale

 

111

 

12

Assets and liabilities held for sale in 2017 mainly comprised the businesses sold to BASF.

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