Scope of Consolidation; Subsidiaries and Affiliates

Changes in the scope of consolidation

Changes in the scope of consolidation in 2016 were as follows:

Change in Number of Consolidated Companies

Bayer AG and consolidated companies

 

Germany

 

Other countries

 

Total

December 31, 2015

 

68

 

239

 

307

Changes in scope of consolidation

 

 

1

 

1

Additions

 

 

2

 

2

Retirements

 

(4)

 

(5)

 

(9)

December 31, 2016

 

64

 

237

 

301

The decrease in the total number of consolidated companies in 2016 was primarily due to mergers among Group companies.

Bayer Pearl Polyurethane Systems LLC, United Arab Emirates, is fully consolidated because the Bayer Group holds a majority of the voting rights.

Pure Salt Baytown LLC, United States, is fully consolidated as a structured entity. The Bayer Group guarantees the liabilities of Pure Salt Baytown LLC to banks. These liabilities, which are reflected in full in the consolidated statement of financial position, amounted to €12 million as of December 31, 2016 (2015: €17 million).

The above table includes one joint operation, LyondellBasell Covestro Manufacturing Maasvlakte V.O.F., Netherlands, as of December 31, 2016 (2015: one). Pursuant to IFRS 11, Bayer’s share of this company’s assets, liabilities, revenues and expenses are included in the consolidated financial statements in accordance with Bayer’s rights and obligations. The main purpose of LyondellBasell Covestro Manufacturing Maasvlakte V.O.F., Netherlands, is the joint production of propylene oxide (PO) for Covestro and its partner Lyondell.

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. 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 (2015: four) associates and six (2015: three) joint ventures were accounted for in the consolidated financial statements using the equity method. Details of these companies are given in the 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 72 (2015: 71) subsidiaries, including one (2015: one) structured entity and 12 (2015: 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 0.2% of Group sales, less than 0.2% of equity and less than 0.2% of total assets.

Details of subsidiary and affiliated companies pursuant to Section 313 of the German Commercial Code can be accessed at (PDF:) www.bayer.com/owner16.

The following domestic subsidiaries availed themselves in 2016 of certain exemptions granted under Section 264, Paragraph 3, and Section 264b of the German Commercial Code regarding the publication of legal-entity financial statements:

German Exempt Subsidiaries

Company name

 

Place of business

 

Bayer’s interest

 

 

 

 

%

Adverio Pharma GmbH

 

Schönefeld

 

100.0

AgrEvo Verwaltungsgesellschaft mbH

 

Frankfurt am Main

 

100.0

Alcafleu Management GmbH & Co. KG

 

Schönefeld

 

99.9

Bayer 04 Immobilien GmbH

 

Leverkusen

 

100.0

Bayer 04 Leverkusen Fußball GmbH

 

Leverkusen

 

100.0

Bayer Altersversorgung GmbH

 

Leverkusen

 

100.0

Bayer Animal Health GmbH

 

Leverkusen

 

100.0

Bayer Beteiligungsverwaltung Goslar GmbH

 

Leverkusen

 

100.0

Bayer Business Services GmbH

 

Leverkusen

 

100.0

Bayer Chemicals Aktiengesellschaft

 

Leverkusen

 

100.0

Bayer Consumer Care Deutschland GmbH

 

Berlin

 

100.0

Bayer CropScience Aktiengesellschaft

 

Monheim am Rhein

 

100.0

Bayer CropScience Biologics GmbH

 

Wismar

 

100.0

Bayer CropScience Deutschland GmbH

 

Langenfeld

 

100.0

Bayer Direct Services GmbH

 

Leverkusen

 

100.0

Bayer Gastronomie GmbH

 

Leverkusen

 

100.0

Bayer Gesellschaft für Beteiligungen mbH

 

Leverkusen

 

100.0

Bayer Innovation GmbH

 

Leverkusen

 

100.0

Bayer Intellectual Property GmbH

 

Monheim am Rhein

 

100.0

Bayer Real Estate GmbH

 

Leverkusen

 

100.0

Bayer Schering Pharma AG

 

Berlin

 

100.0

Bayer Vital GmbH

 

Leverkusen

 

100.0

Bayer Weimar GmbH und Co. KG

 

Weimar

 

100.0

Bayer-Handelsgesellschaft mit beschränkter Haftung

 

Leverkusen

 

100.0

BGI Deutschland GmbH

 

Leverkusen

 

100.0

Chemion Logistik GmbH

 

Leverkusen

 

100.0

Dritte Bayer Real Estate VV GmbH & Co. KG

 

Schönefeld

 

100.0

Erste Bayer Real Estate VV GmbH & Co. KG

 

Schönefeld

 

100.0

Erste K-W-A Beteiligungsgesellschaft mbH

 

Leverkusen

 

100.0

Fünfte Bayer Real Estate VV GmbH & Co. KG

 

Schönefeld

 

100.0

GP Grenzach Produktions GmbH

 

Grenzach-Wyhlen

 

100.0

Hild Samen GmbH

 

Marbach am Neckar

 

100.0

Intendis GmbH

 

Berlin

 

100.0

Intraserv GmbH & Co. KG

 

Schönefeld

 

100.0

Jenapharm GmbH & Co. KG

 

Jena

 

100.0

KOSINUS Grundstücks-Verwaltungsgesellschaft mbH & Co. Gamma OHG

 

Schönefeld

 

100.0

KVP Pharma+Veterinär Produkte GmbH

 

Kiel

 

100.0

MENADIER Heilmittel GmbH

 

Berlin

 

100.0

Schering-Kahlbaum Gesellschaft mit beschränkter Haftung

 

Berlin

 

100.0

Sechste Bayer Real Estate VV GmbH & Co. KG

 

Schönefeld

 

100.0

Siebte Bayer VV GmbH

 

Leverkusen

 

100.0

Steigerwald Arzneimittelwerk GmbH

 

Darmstadt

 

100.0

TECTRION GmbH

 

Leverkusen

 

100.0

TravelBoard GmbH

 

Leverkusen

 

100.0

Vierte Bayer Real Estate VV GmbH & Co. KG

 

Schönefeld

 

100.0

Zweite Bayer Real Estate VV GmbH & Co. KG

 

Schönefeld

 

100.0

Zweite K-W-A Beteiligungsgesellschaft mbH

 

Leverkusen

 

100.0

Business combinations and other acquisitions

Business combinations and other acquisitions in 2016

Adjustments to purchase prices and purchase price allocations effected in 2016 relating to previous years’ transactions totaled minus €5 million. Adjustments to purchase price allocations and other adjustments increased the total carrying amount of goodwill by €9 million.

The changes in goodwill mainly resulted from the following purchase price allocation adjustment: On July 1, 2015, Crop Science completed the acquisition of all the shares of SeedWorks India Pvt. Ltd., based in Hyderabad, India. The company is specialized in the breeding, production and marketing of hybrid seeds of tomato, hot pepper, okra and gourds. It has research and seed processing locations in Bangalore and Hyderabad, respectively. The purchase of SeedWorks India is intended to further strengthen Crop Science’s vegetable seed business in India. A purchase price of €80 million was agreed, pertaining mainly to patents, research and development projects and goodwill.

Improved information obtained about the acquired assets in the first quarter of 2016 in the course of the global purchase price allocation 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. Capital contribution liabilities of US$255 million to Casebia Therapeutics LLP were recognized in the statement of financial position as of December 31, 2016. These liabilities mature on December 31, 2020, at the latest. US$45 million was already paid in 2016, and a further US$60 million was paid on January 3, 2017.

On December 9, 2016, Bayer and Versant Ventures, San Francisco, United States, established the joint venture BlueRock Therapeutics LP, San Francisco, United States. The company 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. As of December 31, 2016, Bayer had capital contribution obligations of US$150 million pertaining to the establishment of the joint venture. This amount should be paid by December 31, 2020, at the latest.

Acquisitions after the end of the reporting period

On January 3, 2017, Bayer acquired the Cydectin™ portfolio in the United States from Boehringer Ingelheim Vetmedica Inc., St. Joseph, 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. An initial purchase price of approximately €150 million was agreed, which is subject to the usual price adjustment mechanisms. The purchase price was provisionally allocated mainly to trademarks and goodwill. The purchase price allocation currently remains incomplete pending compilation and review of the relevant financial information.

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. Bayer thus has a contingent financial commitment in the amount of approximately US$56 billion to acquire Monsanto’s entire outstanding capital stock. The agreed 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 set of solutions to meet growers’ current and future needs, including enhanced solutions in high-quality seeds and traits, digital farming, and crop protection. 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 bank financing was subsequently syndicated to more than 20 other partner banks of Bayer.

Bayer intends to finance the transaction with a combination of debt and equity. The planned equity component amounts to approximately US$19 billion in total. As the first part of the equity component, Bayer placed €4 billion in mandatory convertible notes on November 22, 2016, excluding subscription rights for existing stockholders of the company. The remainder of the equity component is expected to be raised by way of a rights issue. The net proceeds from the issuance of the mandatory convertible notes were used for the early replacement of a portion of the undrawn syndicated bank creditfacility. Details of the mandatory convertible notes issue are provided in the Note “Equity”.

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. Closing of the transaction is currently expected by the end of 2017.

The merger agreement provides for payment by Bayer of a US$2 billion reverse break fee including, in particular, in the event that the necessary antitrust approvals are not granted by June 14, 2018, and Bayer or Monsanto therefore terminates the merger agreement.

Acquisitions in 2015

In 2015, the following acquisitions were accounted for in accordance with IFRS 3:

On March 2, 2015, Covestro successfully completed the acquisition of all the shares of Thermoplast Composite GmbH, Germany, a technology leader specializing in the production of thermoplastic fiber composites. The aim of the acquisition is to expand the range of polycarbonate materials for major industries to include composites made from continuous fiber-reinforced thermoplastics. A purchase price of €18 million was agreed, including a variable component of €4 million. The purchase price mainly pertained to patents and goodwill.

In connection with the acquisition of the consumer care business of Merck & Co., Inc., Whitehouse Station, New Jersey, United States, in 2014, the production facilities at the Pointe-Claire site in Canada were acquired on July 1, 2015. Of the agreed €67 million purchase price, €61 million pertains to property, plant and equipment.

The global purchase price allocation for the consumer care business acquired from Merck & Co., Inc. in 2014 was completed in September 2015. This resulted in an €821 million increase in deferred tax assets due to temporary differences between the carrying amounts of intangible assets in the IFRS financial statements and those reported for tax purposes, along with a corresponding decline in goodwill in the statement of financial position. These adjustments were effected retroactively as of the date of acquisition pursuant to IFRS 3.45 ff. In addition, the purchase price was reduced by €8 million in 2015 on the basis of agreed purchase price adjustment mechanisms.

Settlements were reached in August 2015 in the court proceedings initiated by former minority stockholders of Bayer Pharma AG (formerly Bayer Schering Pharma AG). The additional payment made as a result represents a subsequent purchase price adjustment according to the March 31, 2004, version of IFRS 3 in effect at the acquisition date. The goodwill was increased by €261 million in 2013 based on the status of the proceedings at that time. Following the settlements in August 2015, it was possible to finally determine the goodwill arising from the acquisition. It was therefore necessary to reduce the goodwill amount by €115 million in 2015 as a result of the proceedings. Both the increase and the reduction were recognized outside profit or loss against the liability resulting from the minority stockholders’ compensation claim.

The global purchase price allocation for Dihon Pharmaceutical Group Co. Ltd., Kunming, Yunnan, China, acquired in 2014, was completed in October 2015. The main outcomes were increases in the amounts recognized for trademarks (€18 million), other provisions (€19 million) and other liabilities (€27 million). The purchase price was reduced by €43 million in 2015 due to adjustment mechanisms.

Divestments, material sale transactions and discontinued operations

Divestments and discontinued operations in 2016

The effects of divestments and discontinued operations in 2016 and those from previous years on the consolidated financial statements were as follows:

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

The sale of the Diabetes Care business also comprises further significant obligations by Bayer that will be fulfilled over a period of up to two years subsequent to the date of divestments. The sale proceeds will be recognized accordingly over this period and reported as income from discontinued operations. Deferred income has been recognized in the statement of financial position and will be dissolved as the obligations are fulfilled. Of this, an amount of €497 million was recognized in sales in 2016. The €71 million outflow of net assets is reflected accordingly in the cost of goods sold.

The obligations to be 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. These resulted in sales of €76 million in 2016. This information is provided from the standpoint of the Bayer Group and does not present these activities as a separate entity. It is therefore not possible to compare these sales against the proceeds from operational product sales achieved in 2015.

The items in the statement of financial position pertaining to the Diabetes Care business are shown in the segment reporting under “All other segments.” In addition to the aforementioned deferred income (€469 million), the statement of financial position includes other receivables (net: €66 million), deferred tax assets (net: €73 million), income tax liabilities (€65 million) and miscellaneous provisions (€9 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. The Consumer business encompasses the Bayer Garden and Bayer Advanced businesses in Europe and North America. These activities are reported as discontinued operations in the income statement and the statement of cash flows.

The effects of these and other, smaller divestments made in 2016 were as follows:

Divested Assets and Liabilities

 

 

2015

 

2016

 

 

€ million

 

€ million

Goodwill

 

 

36

Patents and technologies

 

 

4

Other intangible assets

 

 

16

Inventories

 

 

184

Provisions for pensions and other post-employment benefits

 

 

(28)

Other provisions

 

 

(97)

Divested net assets

 

 

115

The income statements for the discontinued operations are given below:

Income Statements for Discontinued Operations

 

 

Diabetes Care

 

CS Consumer

 

Total

 

 

2015

2016

 

2015

2016

 

2015

2016

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

1

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

Net sales

 

947

573

 

239

195

 

1,186

768

Cost of goods sold

 

(380)

(146)

 

(118)

(121)

 

(498)

(267)

Gross profit

 

567

427

 

121

74

 

688

501

Selling expenses

 

(386)

(9)

 

(95)

(83)

 

(481)

(92)

Research and development expenses

 

(48)

(1)

 

(7)

(11)

 

(55)

(12)

General administration expenses

 

(36)

(12)

 

(6)

(9)

 

(42)

(21)

Other operating income / expenses

 

(20)

(4)

 

(4)

(55)

 

(24)

(59)

EBIT1

 

77

401

 

9

(84)

 

86

317

Financial result

 

 

 

Income before income taxes

 

77

401

 

9

(84)

 

86

317

Income taxes

 

3

(76)

 

(4)

27

 

(1)

(49)

Income after income taxes

 

80

325

 

5

(57)

 

85

268

The discontinued operations affected the Bayer Group statements of cash flows as follows:

Statements of Cash Flows for Discontinued Operations

 

 

Diabetes Care

 

CS Consumer

 

Total

 

 

2015

2016

 

2015

2016

 

2015

2016

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Net cash provided by (used in) operating activities

 

43

788

 

11

42

 

54

830

Net cash provided by (used in) investing activities

 

(4)

 

(2)

 

(6)

Net cash provided by (used in) financing activities

 

(39)

(788)

 

(9)

(42)

 

(48)

(830)

Change in cash and cash equivalents

 

 

 

As no cash is assigned to discontinued operations, the balance of the cash provided is deducted again in financing activities.

Divestments and material sale transactions in 2015

On March 2, 2015, Animal Health completed the sale of two equine products, Legend / Hyonate and Marquis, to Merial, Inc., Duluth, Georgia, United States. A purchase price of €120 million was agreed. The one-time payment was accounted for as deferred income. The purchase prices for Legend / Hyonate and Marquis are being reflected in sales and earnings over a four-year and a three-year period, respectively, as Bayer has entered into further significant obligations.