Sitting pretty for $17 billion?

Merck KGaA acquiring Sigma-Aldrich to enhance position in increasingly attractive life-sciences market

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DARMSTADT, Germany—Merck KGaA has been on a journey to build its three business units into vehicles for growth, and the German Big Pharma has made a strong step in that direction on the life-sciences side by announcing in late September that it has entered into a definitive agreement to acquire St. Louis-based Sigma-Aldrich for €13.1 billion (approximately $17 billion).
The combined life-sciences business is expected to have solid growth potential, strong and sustainable cash flow and meaningful efficiency potential on an operational level. Based on fiscal year 2013 financials, the business would have had combined sales of $6.1 billion, an increase of 79 percent, and combined earnings before interest, taxes, depreciation and amortization before one-time items (EBITDA pre) of $2 billion, which is an increase of 139 percent. Merck Group’s sales would have increased by approximately 19 percent. For the same period, the acquisition would have increased Merck Group’s EBITDA pre by approximately 24 percent and improved group EBITDA pre margin from approximately 30 percent to approximately 33 percent including expected synergies.
“This transaction marks a milestone on our transformation journey aimed at turning our three businesses into sustainable growth platforms,” said Karl-Ludwig Kley, chairman of Merck’s executive board. “For our life-science business, it’s even more than that: it’s a quantum leap. In one of the world’s key industries, two companies that fit perfectly together have found each other to present a much broader product offering to our global customers in research, pharma and biopharma manufacturing and diagnostic and testing labs. As such, the combination of Merck and Sigma-Aldrich will secure stable growth and profitability in an industry that is driven by trends such as the globalization of research and manufacturing. What’s more, the combination gives us the possibility to invest even more in innovation going forward.”
Bridge financing has been secured for the all-cash transaction, and Merck expects the final financing structure will comprise a combination of cash on Merck’s balance sheet, bank loans and bonds. Closing is expected in mid-year 2015, subject to regulatory approvals and other customary closing conditions. This purchase will be Merck’s largest acquisition, surpassing the $13.5 billion it paid for the acquisition of Serono in 2007.
And speaking of Serono, analysts are largely noting that a successful acquisition of Sigma-Aldrich will mean more predictable earnings and make Merck KGaA less dependent on its largest division, the pharma business Merck Serono, which is largely driven by the drug Erbitux for cancer and Rebif for multiple sclerosis. While Merck has been working hard to boost its pipeline in recent years, that pipeline consists largely of early-stage candidates.
Analysts at Citigroup noted that the Sigma-Aldrich acquisition was good news in light of Merck Serono’s “long-standing poor track record in pharmaceutical R&D.”
According to Zacks Investment Research, “This record-breaking acquisition for Merck indicates a strong leap toward the life-sciences business and an increase in presence in North America and the fast-growing markets in Asia. Merck will be able to enjoy the 10,000-plus products that Sigma-Aldrich offers and a leading e-commerce platform in the industry.”
Christi Bird, a senior industry analyst with Mountain View, Calif.-based Frost & Sullivan in its Life Sciences division, goes so far as to say Thermo Fisher Scientific and VWR might want to keep a close eye on Merck’s next moves.
“The acquisition creates a powerhouse chemicals, reagents, life-science kits and labware supplier, combining Merck’s EMD Millipore $3.3-billion arm and Sigma-Aldrich’s $2.7-billion global presence,” Bird says. “Once sales synergies occur, selling into the same organizations should help augment brand recognition and customer capture for both companies. This is particularly true for EMD Millipore, which will benefit from Sigma-Aldrich’s truly global reach (including a strong position in fast-growing Asia), well-established brand recognition and leading e-commerce platform.”
Meanwhile, Sigma-Aldrich is going to benefit from Merck’s positioning in the pharmaceutical industry, Bird adds, noting that “should a collaborative spirit build between Sigma-Aldrich’s product development and Merck’s pharmaceutical business, Sigma is poised to deliver highly optimized product offerings from the entire upstream R&D to downstream bio-production processes of drug development.”
This could be disruptive to the industry in the sense that the combined company could emerge as a third major distribution company able to compete with Thermo Fisher Scientific and VWR.
“Until now, no company had the infrastructure, global reach, supply chain and product portfolio to compete with these two behemoth distributors of laboratory products,” Bird observes. “While Merck will have to beef up its portfolio of instruments and equipment to truly provide end-to-end life-sciences solutions, it could easily be achieved through the brand distributor or OEM model. If you’re Thermo or VWR, you’re keeping a close eye on Merck’s next moves. A third major distributor of laboratory products could mean even greater competition, leading to greater customer bargaining power and lower prices in what has long been an industry of market share tug-of-war between Thermo and VWR.”
Merck will acquire all of the outstanding shares of Sigma-Aldrich for $140 per share in cash. The agreed price represents a 37-percent premium to the latest closing price of $102.37 on Sept. 19, 2014, and a 36-percent premium to the one-month average closing price. Merck expects to achieve annual synergies of approximately $340 million, which are expected to be fully realized within three years after closing. Merck has pledged to maintain a “significant presence” in St. Louis and Billerica, Mass., where Sigma Aldrich has its major operations.
 “The combined company will be well-positioned to deliver significant customer benefits, including a broader, complementary range of products and capabilities, greater investment in breakthrough innovations, enhanced customer service and a leading e-commerce and distribution platform in the industry,” noted Rakesh Sachdev, president and CEO of Sigma-Aldrich. “This transaction is a clear validation of our success in transforming Sigma-Aldrich into a customer-focused and solutions-oriented global organization. We believe this is a very positive outcome for our shareholders, who will receive a significant premium, and our employees, who will benefit from enhanced opportunities as part of a larger, more global organization.”
Asked about why this was a good time for such a large acquisition, Merck’s Kley said, “Well, we see a lot of things going on in the sector. We see a lot of technical developments, of technological developments. We see our customers demanding more and more, asking for more global solutions, asking for more service in the sector itself. Now it’s time to give more answers to customers’ needs. The second aspect comes from the internal side. We have finished our efficiency program, rolled out the efficiency measures and we are ready to take the next step. And the next step is strengthening our life-science business with this deal.”

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