German pharmaceutical and chemical company Merck KGaA (MRK.XE) Thursday said it has bought the majority of Swiss pharmaceuticals firm Serono SA (SEO.VX) from the controlling Bertarelli family, and launched an offer for the company's remaining shares.
Merck paid CHF1,100 a share in cash to the family, which held 64.5% of Serono's capital and 75.5% of the company's voting rights. Merck also said it will make a public tender offer of CHF1,100 under Swiss law.
The Merck offer values Serono at more than CHF16 billion, or EUR10.6 billion. The offer price represents a 20% premium to Serono's price at Wednesday's close.
The Swiss Exchange suspended trading in Serono Thursday, while Merck shares were down EUR4.46, or 5.7%, at EUR73.90, in a slightly higher German market at 0925 GMT.
The deal is a good one for Serono shareholders, analysts said, but they were skeptical about the benefits for Merck.
"This is more a deal out of desperation than one of real strategic logic," said Denise Anderson, analyst in Zurich at Kepler Equities, who has a reduce rating on Serono. Merck is certainly increasing the size of its pharmaceutical business, but there is no overlap between the two businesses, and consequently little cost cut potential, she said.
Both companies have relatively weak pipelines, and simply merging the two businesses won't change this. Still, the combined group will have an annual budget of EUR1 billion.
Serono's pipeline suffered several setbacks last year, when a number of product candidates failed in late stages of clinical testing.
Merck's pipeline virtually dried up in June when its Parkinson's disease drug Sarizotan failed in late-stage clinical tests, leaving only some cancer drugs in early-stage trials.
Merck will also have to take on Serono's exposure to the rapidly-changing multiple sclerosis market. The company, which had more than $2.5 billion in sales, is depending on MS drug Rebif for growth. The drug is still growing at handsome double-digit rates, but is facing competition from oral treatments that are in development at several companies, including Serono itself, and Swiss drugmaker Novartis AG (NVS).
Over the past year, Serono has changed its strategy several times.
Last year, the company put itself on the block, hiring Goldman Sachs (GS) to find a buyer, but no deal materialized. Then, in April, Serono decided to instead grow on its own through takeovers, and asked shareholders for permission to raise $5 billion in new equity to finance possible acquisitions.
Serono Chief Executive, and member of the founding family, Ernesto Bertarelli told Dow Jones Newswires in May that although there had been a lot of interest from potential buyers, nobody offered a deal that would have benefitted the company and its shareholders.
Beyond the price, another sticking point was that Serono wanted to keep its headquarters in Geneva.
"If a big pharma company had bought it, there would have been a big chance that the Geneva headquarters would at least be decimated," said Bob Pooler, analyst in Zurich with private bank Lombard Odier Darier Hentsch, who has a hold rating on Serono.
Merck said Thursday the headquarters of the biopharmaceutical business of the combined group - to be called Merck-Serono Biopharmaceuticals - will be in Geneva. Boston, Mass will remain the combined operation's U.S. headquarters.
Merck filed a hostile takeover offer for German rival Schering AG (SHR) in March, but was outbid 10 days later by its rival Bayer AG (BAY). Already then, Merck had also considered bidding for Serono, but pulled out of the bidding process, when at least two big U.S. pharmaceutical companies placed higher bids, said a person familiar with Merck's negotiations.
The combined pharmaceutical business will have pro-forma sales of EUR3.6 billion and the new Merck Group will have pro-forma sales of EUR7.7 billion.
Merck, which is itself 75% family owned, said the acquisition will be paid for by a combination of cash and bridge financing, comprising a syndicated loan, a bond issue and a capital increase of EUR2 billion to EUR2.5 billion.
The Merck family will participate in the capital increase with up to EUR1 billion.
"Details of the financing will be provided prior to closing, early 2007," a Merck spokesman said when asked which banks are participating in the finance. The company said it expects to keep its investment grade rating.
Merck, produces chemicals such as liquid crystals and drugs such as cancer treatment Erbitux. The company, advised by Goldman Sachs, had been actively seeking an acquisition as its drug pipeline dried out.
The company's best seller, cardiovascular treatment Concor, booked EUR87.1 million in second quarter sales and its third leading drug, diabetes treatment Glucophage, booked sales of EUR73.3 million in the quarter.
Merck booked total second quarter sales of EUR1.52 billion, up 4.5%, and net profit of EUR538 million, some EUR400 million of which was a one-off gain from selling its Schering shares to Bayer.
Serono published second quarter sales of $628.7 million, up 2.8% and a net profit of $189.3 million, up 8%.
The company's lead product, multiple sclerosis treatment Rebif, contributed $361.6 million to those sales, up 10.9% on the year.
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