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Merck bids $17.4 billion for Schering
Mon Mar 13, 2006 09:38 AM ET

FRANKFURT (Reuters) - Drugs and chemicals group Merck unveiled a 14.6-billion-euro ($17.4 billion) cash bid for domestic rival Schering on Monday, marking the first big all-German move in the industry's consolidation.

Merck confirmed it was making the unsolicited offer, at 77 euros a share, a 15 percent premium to Schering's share price on Friday. Schering had said on Sunday that it had been told of the offer but felt the price was too low.

The offer, which will create Germany's biggest drugmaker, sent shares in Schering up 25 percent to 83.73 euros, with some industry analysts seeing a possible competing bid, although Merck fell 2.8 percent on fears that it could be overpaying for its Berlin-based competitor.

The head of Schering's supervisory board, Giuseppe Vita, said in Milan he expected a white knight to emerge.

"Not yet, but I think they will be knocking on our door soon," he said, when asked if a white knight had already appeared.

A deal between the similar-sized rivals would create the first big all-German pharmaceuticals combination, with annual sales of 11.2 billion euros, at a time when the country's industry, once a world leader, has shrunk in prominence.

But some analysts questioned the price Merck was paying.

"I can't understand why one would pay so much for a company that has below-average potential growth," said Equinet analyst Martin Possienke, adding that he did not see major drivers for Schering beyond 2008 because of its weak new drug pipeline.

"Merck's paying 21.4 times our 2006 earnings estimate for Schering, against a sector multiple of 18 times," he said.

But Dresdner Kleinwort Wasserstein said in a note it expected a competing offer from another pharmaceuticals company or private equity investors.

"We retain our view that Schering is an obvious candidate for an LBO, and that with cost savings, the present value of near-term cash flows exceed the current market cap."

Other analysts suggested possible interest from Switzerland's Novartis, which already collaborates with Schering on an experimental cancer drug and is widely seen as a consolidator in the sector.

"I suspect other pharma companies will take the opportunity to have a look at the books -- Novartis in particular," said one analyst. "Whether they (Novartis) would choose to proceed, I would be more skeptical."

If it goes through, the Merck bid would be the first step in the consolidation of Germany's drug sector since the 1998 merger of Hoechst with France's Rhone-Poulenc to create Aventis, since bought by Sanofi to make Sanofi-Aventis.

Merck's finance head Michael Becker told a news conference that the company had spoken to Schering's big shareholders, who he said did not appear to share the Schering board's views.

Insurer Allianz, which holds 11.8 percent of Schering, declined to comment on whether it would sell shares, but has in the past said industrial holdings are not strategic.

Merck also said that Karl-Ludwig Kley, currently finance head at airline Deutsche Lufthansa, would become deputy CEO at Merck to oversee the Schering integration.


Merck said it expected annual synergies of 500 million euros, to be fully reached by 2009. It said the deal would have a positive impact on adjusted earnings per share (EPS), increasing its 2005 figures by more than 10 percent, even without synergies.

Merck said the 14.6-billion-euro payment would be financed by a combination of existing funds, debt and equity.

The company will initially finance the takeover through existing cash and bridge financing from Bear Stearns, Deutsche Bank and Goldman Sachs.

Merck said it was committed to retaining its investment grade rating, and that it would carefully consider a compensation of bond holders in a 500-million-euro bond to avoid deterioration in their investments.

After initially widening some 30-40 basis points, Merck's 3.75 percent euro bond due 2012 pared losses to trade some 20 basis points wider thanks to Merck's statement on compensation, a trader in London said.

Merck said it planned a capital increase of between 500 million and 4 billion euros, depending on the offer's takeup.

The family that owns 73 percent of Merck will plow 1 billion euros into the deal, and Becker said its holding would come down to 60 percent if the deal was successful and the capital increase went through.

Merck's offer, which will run from the end of the month to mid-May, is contingent on winning 51 percent of Schering.

Goldman Sachs and Deutsche Bank are advising Merck, while Morgan Stanley is adviser to Schering.

To see a factbox on Schering and Merck, please double click on

(Additional reporting by Ben Hirschler and Richard Barley in London, Gianluca Semeraro in Milan and Jonathan Gould in Frankfurt)

Source: Merck

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