By Neetha Mahadevan
FRANKFURT--German pharmaceutical company Merck KGaA on Monday
said it would acquire U.S. firm Sigma-Aldrich Corp. for $17
billion, as it bids to strengthen its position in the life science
industry.
Merck will acquire all of Sigma-Aldrich for $140 a share in
cash, a 37% premium to Sigma's closing share price on Friday, which
industry experts note is a high price for Sigma. The acquisition,
the largest in Merck's history, represents "a quantum leap" for its
life sciences business and increases its presence in North America
and Asia, Chief Executive Karl-Ludwig Kley said.
Shares of Merck rose as investors bet the move would make the
company one of the leading players in the $130 billion global life
science industry.
"This looks like a very strategic deal and, at first glance, it
makes a lot of sense--even if the size of the deal is surprising,"
Warburg analyst Ulrich Huwald said, adding that the companies have
complementary segments and the deal will increase Merck's
value.
St. Louis-based Sigma-Aldrich specializes in products used in
scientific research and development in fields from biotechnology to
pharmaceuticals. It also manufactures high-technology materials for
smartphones and TV screens.
The acquisition bolsters Merck's U.S. unit, Merck Millipore, and
will help increase its scale, presence and offering in the U.S. as
well as bulking up in other locations, Barclays analyst Michael
Leuchten said.
"The strategic fit is strong," Mr. Leuchten said.
Sigma also supplies chemicals and services to major
pharmaceutical companies like Pfizer and Novartis, and academic
institutions.
"By merging, we are securing for us stable growth and
profitability in our life science business and benefiting from
trends like increasing globalization of research and pharmaceutical
production," Mr. Kley said.
Monday's deal is the latest in a string of transactions in the
pharmaceutical industry, which has seen a surge in M&A activity
this year. AbbVie Inc. agreed to pay $54 billion for Shire PLC,
while GlaxoSmithKline PLC and Novartis AG agreed to swap some
businesses in a deal worth more than $20 billion
Pharmaceutical companies have been increasingly shedding noncore
activities to strengthen core businesses, leading to shopping trips
on both sides of the Atlantic. However, Merck's decision to become
more diversified flies in the face of these recent deals.
"The U.S. has many attractive targets and the prices that are
being paid are rather high, but German companies wouldn't mind
paying that if the target fits their strategy," Ernst & Young's
sector leader for life sciences and chemicals transactions, Stefan
Rösch-Rötschje, said. He cited the timing of Bayer AG's acquisition
of Merck & Co.'s consumer-product business for $14.2 billion
earlier this year.
Bayer later went on to shed its noncore plastics business to
focus on life science. Merck KGaA isn't affiliated with Merck &
Co. of the U.S.
The Sigma-Aldrich purchase is expected to immediately boost
Merck's adjusted earnings per share and operating profit margin.
Merck expects annual synergies of about 260 million euros ($334
million), it said should be fully achieved within three years after
closing. It also expects integration costs of about 400 million
euros spread over 2015 to 2018.
Sigma-Aldrich will become part of Merck Millipore, which
accounts for about 25% of the company's annual revenue.
The deal would more than double the unit's adjusted earnings
before interest, taxes, depreciation and amortization even without
synergies.
Merck has already secured bridge financing for the all-cash deal
and expects it to close mid-2015, pending regulatory approvals. If
the deal closes as planned, it will leave Merck with more
predictable earnings, and the company will be less reliant on its
largest division, pharmaceutical business Merck Serono
That is a relief, since sales at Merck Serono are dominated by
just two prescription drugs: Rebif for multiple sclerosis and
cancer treatment Erbitux. Rebif is facing stiff competition from
cheaper, generic drugs, and saw sales slide 2.8% in the second
quarter. Analysts fret that Erbitux could also face generic
competition from 2018.
The deal also takes the pressure off the Merck Serono business
to deliver on new pipeline drugs, a decision analysts at Citigroup
noted was positive given the company's "long standing poor track
record in pharmaceutical R&D." Merck has focused on rebuilding
its pipeline in recent years, but the bulk of its experimental
drugs are still early stage, meaning revenues are many years away,
if the drugs make it through clinical trials at all.
The acquisition has been unanimously approved by Sigma-Aldrich's
board of directors and will be presented to the company's
shareholders for approval at a special meeting.
Sigma-Aldrich has delivered consistent results in recent years,
with revenue and profit often meeting or exceeding analysts'
expectations. For the three months ended June 30, the company
posted $701 million in sales, up 2.9% over the prior-year period,
while the bottom line jumped 12%, driven by growth in the U.S.
research market.
Michael Calia and Hester Plumridge contributed to this
article.
Write to Neetha Mahadevan at neetha.mahadevan@wsj.com
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