Here's the presentation David Einhorn just gave to a room of elite hedge fund managers

As with all love stories, there is conflict, and an uncertain ending. Will something get in the way of true love. Or will they consummate the marriage and live happily ever after?

As I walk you through their journey, there is one thing you need to keep in mind: Whether they make it to the altar, or get thwarted along the way, there’s going to be a celebration for Bayer shareholders either way. With cake. And we like cake.

Bayer is worth about 73 billion Euros with an Enterprise value of 104 billion Euros. Historically a chemicals and pharmaceutical company, Bayer is transforming into a life sciences company. It spun off Lanxess in 2005, and is now shedding Covestro, its remaining chemicals business.

Last year Bayer sold 31% of Covestro in an IPO, with plans to divest the rest.

It is made up of four primary divisions: Pharma, crop science, consumer health, and animal health. In 2015, it had total revenue of 34.3 billion Euros.

Instead, it decided to go with a rough cut, crop sciences dude named Monsanto, and the market did not respond well.

The continued ag cycle weakness caused earnings expectations for 2016 to come down from a high of about 8 Euros per share to a low of 7.25. When Bayer announced this corny acquisition, the stock collapsed to 85 Euros per share, or only 11.3x earnings.

There are those who look at Monsanto as a terrible partner and want nothing to do with it. Some of those investors sold their stock on the announcement, and would be happy to buy
back in if the couple breaks up. And then there are the investors who like the pairing, but see obstacles on the way to the altar. They won’t join the party until the marriage is consummated and the wedding is paid for.

Some investors only want wedding cake, others only want break‐up cake, and neither group seems to want to own the stock until it knows which cake will be served. We think that’s the opportunity. We can buy the stock knowing that there will be a party either way. And though we think wedding cake is a little better than break‐up cake, both outcomes come with cake. And again, we like cake. Let’s start by looking at break‐up cake, or how Bayer looks like on its own.

Some of its 100‐year‐old products look familiar (though they no longer sell heroin) but you’re likely to recognize its current drugs only if you or a loved one suffers from…

Xarelto is a blood thinner which is replacing Warfarin, a very old drug with nasty side effects. It reduces strokes and Bayer is conducting studies for additional indications. In the third quarter of 2016, Xarelto revenues grew 35%. In September, management increased its estimates of annual peak sales from 3.5 billion Euros to over 5 billion. In response, the market yawned.

In the most recent quarter, Eylea grew 28%. In September, management increased its estimates for annual peak sales from 1.5 billion Euros to over 2.5 billion and the market yawned about this, too. It makes us wonder if Bayer has any drugs in the pipeline to treat inappropriate yawning.

Biologics are difficult to reproduce, so competition will be slow to market, and sales will fall off gently. And the manufacturing for its cancer drug Xofigo requires access to a nuclear facility, so not just anyone will be able to produce a generic. The Mirena IUD and Kogenate should have longer exclusivity as a result of something called Lifecycle Management.

It’s a bit like when my pet goldfish died. My mom kept secretly replacing Lambeau with a new goldfish until she finally agreed to get me a brother.

Sales grew 18% last year. In the case of Kogenate, the patent isn’t for the compound itself, but rather for its hard‐to‐replicate manufacturing process. That patent expires in 2017. That’s why, starting in the first quarter of 2016, Bayer is gradually replacing Kogenate with Kovaltry, a similar but longer‐acting hemophilia drug that magically uses the same manufacturing facilities. In 2018, Bayer will add Damoctocog alfa to the hemophilia franchise, putting itself one more step ahead of generic competition.

Bayer’s non‐patent‐protected diabetes drug Glucobay and prescription aspirin, which hasn’t been under patent for about a hundred years, each grew over 2% to over half a billion Euros in 2015. This performance was typical of Bayer’s 8 billion Euro off‐patent portfolio.

Bayer is developing new drugs for cancer, lymphoma, chronic heart failure, diabetic kidney disease, and uterine fibroids. These are all small opportunities, which means that the earnings trajectory for the next few years isn’t very dependent on clinical trial outcomes.

And most of the new pipeline is expected to come online prior to the expiration of existing patents.

Bayer mostly hasn’t engaged in this, and its sales in Europe and Japan are already subject to price controls. Compared to its peers, Bayer is less exposed to future pricing pressure.

Peers with good profiles, like Roche, Sanofi and GSK trade around 14x earnings. Bayer has a portfolio of established drugs in the middle of their growth curve, a pipeline of new drugs coming out in the next 3‐4 years, no imminent patent expirations, and strategies to extend those at risk. All told, we think Bayer deserves a premium multiple to the group.

Or in your beach bag like Coppertone. Or under your feet like Dr. Scholl’s. Or next to your Bloomberg terminal, like Alka‐Seltzer. These are familiar brands which are growing moderately and have good margins. Other companies with brands like these, such as Procter & Gamble and Colgate‐Palmolive, trade at low 20s P/E multiples.

Animal health is an attractive sector with low‐to‐mid single‐digit top line growth and strong EBITDA margins of around 23%. Within Bayer, it’s overlooked and under appreciated. With time, Bayer is likely to beef it up or monetize it. Zoetis is the best comp and trades around 21x earnings.

From 2011 through 2016, sales in Bayer’s crop business have grown 40%. Because the business is focused on crop protection instead of seeds, Bayer has been relatively immune to the current down cycle in agriculture.

Many of its products have intellectual property on more than one ingredient and formulations that provide barriers to entry beyond their patent life. Peers like Syngenta and DuPont trade closer to a 20x P/E multiple.

Since May, expectations in pharma have improved and most everything else is unchanged, but the stock trades with a big penalty for the possible Monsanto deal. It seems to us that if the deal breaks, the stock should recover. There would be a good party for Bayer shareholders. With cake. And we like cake.

It is also the inventor and largest producer of Roundup, the most widely sold weed killer in the world. It does 76% of its business in the United States, Brazil and Argentina, in contrast to Bayer, which is much more focused in Europe and Asia.

Monsanto develops most traits that go into seeds. Monsanto sells the seeds to farmers and also licenses the traits to other companies. Farmers have to choose between an inferior harvest or paying Monsanto, directly or indirectly, a royalty for its technology. Monsanto grabs an increasingly large slice of the agricultural pie, with great margins worthy of a fancy multiple. Monsanto is in a commodity business, but it is not a commodity.

Europeans in particular have objections to GMOs, and are especially put off by Monsanto’s reputation as the company that brought us Agent Orange. And some investors simply aren’t interested in expanding the crop science business at all.

For them, the deal has to get past the regulators, and there are concerns that it won’t close. Certainly, the market thinks it probably won’t, as Monsanto stock at $102 trades at a huge discount to the $128 deal price.

Specifically, Bayer may have to divest some of its cottonseed and herbicide products. The street estimates the direct overlap to be $1.2 billion of sales, which leaves a cushion to the $1.6 billion that Bayer has agreed to divest if necessary to satisfy regulators. We think there is also concern that regulators may mistakenly confuse Bayer’s acquisition of Monsanto’s existing monopoly with an anti‐competitive merger, even though the merger itself would not increase market concentration.

The Senate Judiciary Committee has held hearings to address concerns over the ag industry consolidation and may raise objections to the combined impact of all the mergers.

And worse, Bayer plans to fund a portion of the purchase with an equity rights offering, which creates a perceived overhang on the stock.

The proxy projects a couple of scenarios with average earnings of $7.22 in 2019. We believe that if corn returns to a normal price of $4.50 a bushel, it will add more than a dollar to those projected earnings.

The deal is supposed to close at the end of 2017. By the end of the third year following the close, Bayer thinks it can save $1.2 billion by cutting duplicate sales and marketing organizations across the globe, and increase earnings by an additional $300 million by selling its current products into additional markets.

The future of the agricultural products business is in selectivity; crop protection needs to kill pests and weeds, but not crops. Today, Monsanto has independently developed seeds, and Bayer has independently developed crop protection. Together the combined company hopes to develop insecticides that work with the specific seeds to make better complimentary products.

In the first year, Bayer will generate pro forma EBITDA of 16.1 billion Euros. Working down the income statement, there will be 1.6 billion Euros of Depreciation, 2 billion of interest on 58 billion Euros of pro forma debt, and 25% taxes to get net income of 9.4 billion Euros, or about 10x the pro forma earnings, which takes into account the coming equity dilution. From there, mid‐single digit revenue growth with synergies ramping should drive high‐single digit EBITDA growth and double‐digit earnings growth for the next several years.

On a combined basis the business will be 48% agriculture, 36% pharma, 13% consumer brands, and 3% animal health. We actually bought a bunch of cakes to make this slide. The Greenlight kitchen was very crowded that day. All of these businesses deserve multiples of 14 22 times, and people buying Bayer today get the package for about 10x, if the merger closes.