Merck KGaA announced Monday a definitive agreement to acquire life science company Sigma-Aldrich for $140 per share in cash, or a total of $17 billion, expanding the presence of its Millipore unit in North America and adding exposure to Asian markets. The value of the transaction, which is expected to close in mid-2015, represents a 37 percent premium to Sigma-Aldrich's closing share price on September 19.
"This transaction marks a milestone on our transformation journey aimed at turning our three businesses into sustainable growth platforms," remarked Merck chairman Karl-Ludwig Kley. The executive noted that the combined company will "present a much broader product offering to our global customers in research, pharma and biopharma manufacturing and diagnostic and testing labs."
Commenting on the acquisition, Bloomberg Intelligence analyst Asthika Goonewardene said Merck "seem[s] to be backing away from drug development, which they haven’t been successful in for the last few years." However, Kley noted that the company is committed to the pharmaceutical segment having recently highlighted its Serono unit at a presentation to analysts and has moved to revive the division's pipeline of experimental medicines. "Merck will always build its future on the three pillars" of pharmaceuticals, liquid crystals, laboratory equipment and laboratory chemicals, Kley added.
In 2010, Merck agreed to buy biotechnology-equipment maker Millipore for about $7.2 billion including net debt. Earlier this year, Kley indicated that the company was debt free and in a position to pursue further acquisitions having repaid more than 4.5 billion euros ($5.8 billion) over the last four years related to the purchase of Millipore.
Kley said the Sigma-Aldrich deal will "secure stable growth and profitability in an industry that is driven by trends such as the globalisation of research and manufacturing." According to Merck, the companies' combined life science business would have had sales of 4.7 billion euros ($6 billion) in 2013, an increase of 79 percent, and earnings of 1.5 billion euros ($1.9 billion), a rise of 139 percent. Merck added that its overall revenue would have grown by 19 percent. Merck noted that the transaction is forecast to be immediately accretive to earnings and it expects to achieve annual synergies of approximately 260 million euros ($334 million), which should be fully realised within three years after closing.
Kley also noted that "tax is the last consideration" for the transaction, despite the recent trend of pharmaceutical companies looking to lower their tax rates through strategic acquisitions. "We look at the commercial fit. We look at the business opportunities. Then you have to take into account issues like labour costs...[and] infrastructure costs," Kley remarked, adding that in the US "for example you have low energy costs compared to Europe."
The acquisition has been unanimously approved by both companies' boards, while Sigma-Aldrich's shareholders will vote on the deal at a special meeting of stockholders.
Warburg analyst Ulrich Huwald noted "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." Huwald added that the companies have complementary segments and the transaction will increase Merck's value. Shares in Merck rose as much as 9.4 percent on news of the purchase.
For related analysis, see ViewPoints: Merck KGaA bets big on a lower risk strategy.
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