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 The deal helps Merck, 70 percent controlled by the descendants of
its 17th century founder, to focus more on supplying drugmakers and
academic institutions with chemicals and services, seen as offering
a steadier income stream than drug development.
"With this acquisition we have the opportunity to turn one of our
most reliable businesses into a core earnings contributor," said
finance chief Marcus Kuhnert.
Merck, which has been hit by several drug development failures, said
it was happy for its own pharmaceuticals business to remain a
medium-sized entity.
The deal was approved by Sigma-Aldrich's management but still needs
acceptance from more than 50 percent of the target's shareholders.
Merck said it will acquire Sigma-Aldrich shares for $140 apiece, a
36 percent premium over the one-month average closing price and a 37
percent more than the latest closing price of $102.37 on Friday,
Sept. 19.
St Louis, Missouri-based Sigma had 2013 sales of $2.7 billion and
provides big pharma groups including Pfizer Inc <PFE.N> and Novartis
AG <NOVN.VS> with lab substances such as cell culture substrates. It
also makes chemicals for the technology sector and food testing
products.
The combined lab supplies business would gain more exposure in North
America and Asia, taking on global players such as Thermo Fisher
Scientific Inc. The deal would immediately top-up adjusted earnings
per share.
RECORD PACE
The move comes as healthcare companies strike deals at a record
pace, with year-to-date activity in the sector topping $380 billion,
well over double the year-ago level, according to Thomson Reuters
data.
It represents the second major transatlantic deal for a German
company in the space of a few hours, after Siemens AG <SIEGn.DE>
agreed to buy oilfield equipment maker Dresser-Rand Group Inc <DRC.N>
for $7.6 billion.
Shares in Merck, which initially turned negative on the news, closed
4.3 percent higher at 72.63 euros, against a 0.2 percent lower
European chemicals index <.SX4P>.
Merck expects the tie-up, funded from about 2 billion euros in cash
reserves and the issue of new debt, to yield annual synergy benefits
of 260 million euros ($334 million) within three years after
closing, by measures such as streamlining manufacturing,
administration and research. It said it was too early to say if any
jobs would be cut.
The deal would more than double the lab equipment unit's adjusted
core earnings, even without such synergy gains; including them, the
increase would be 139 percent, based on proforma 2013 results.
"The fact that (the Merck family) are not taking a big step further
into pharma shows that continuous returns on their investment over
time are certainly important to the family," said analyst Ulrich
Huwald at brokerage Warburg.
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At about 6 billion euros in annual sales, Merck's pharmaceuticals
unit is well outside the global top 20, having suffered a series of
drug development setbacks such as with an experimental cancer
vaccine known as tecemotide, or Stimuvax, which did not come to
market due to poor study results.
WAY FORWARD
The group said on Monday that alliances, not major takeovers, would
be the way forward for the unit. "The pharmaceuticals business
(will) remain a good and solid mid-sized player", Kley said.
Merck had earlier this year signaled that big pharma assets were on
its radar and some analysts took a positive view on the fact it had
steered clear of such moves.
Citi analyst Andrew Baum said in a note the acquisition came at a
steep premium of about 30 times Sigma's expected 2015 earnings per
share, but argued the deal was better than buying a biotech or
pharmaceutical asset given what he said was Merck's "long-standing
poor track record in pharmaceutical R&D".
Merck, the largest maker of liquid crystals for TV and computer
screens, made lab supplies a major pillar of its business when it
purchased U.S. group Millipore for $6 billion in 2010. Combining
with Sigma would make it one of the global market's top three, the
group said.
Merck's biggest deal before this one was the takeover of Swiss
biotech company Serono for 10.3 billion euros.
Initial bridge loans to finance the deal will be replaced by about 4
billion euros in bank loans and 7 billion euros in bonds. Merck said
strong combined cash flows would allow for rapid deleveraging.
Guggenheim Securities and JP Morgan advised Merck on the deal,
together with law firm Skadden, while Morgan Stanley acted as
financial adviser to Sigma-Aldrich, with Sidley Austin as legal
adviser.
(Additional reporting by Maria Sheahan and Ben Hirschler; Editing by
Keith Weir and David Holmes)
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