The German chemical and pharmaceutical company, Merck KGaG, based in Darmstadt, has surprised investors and analysts once again. While many investors and experts had expected the company to acquire pharmaceutical businesses, the group is expanding its chemicals division. It has announced plans to acquire the American laboratory supplier Sigma-Aldrich for $17 billion (€13.1 billion).
The purchase, which will be its largest purchase in its near 350-year history should strengthen Merck in the business of laboratory chemicals and intermediate products for biotech production.
The German company is separate from U.S. based drug maker Merck & Co., a global drugs maker. The two divisions split after World War Two, when the United States seized German corporate assets in the States as war reparations. German Merck’s U.S. subsidiary became Merck & Co. and Merk KGaG remained in Germany as its own entity.
“For our life-science business the acquisition is a quantum leap”
Sigma-Aldrich employs 9,000 workers, and recently reported annual sales of about €2.1 billion and a net profit of almost €360 million. If the acquisition goes through, the U.S. company will be assimilated into the Merck Millipore division, which Merck has established as a strong presence in the laboratory business.
Merck chairman Karl-Ludwig Kley, said the acquisition is “a quantum leap,” for the company’s life sciences business.
The Darmstadt-based group is offering Sigma-Aldrich shareholders a premium of 37 percent over the last stock price. The price appears reasonable. It corresponds to 34 times profits and about 20 times operating profits (Ebitda). The premium is higher than chemical-business transactions usually command, but Sigma-Aldrich is also more profitable than most other specialized chemical companies and generates a 24 percent operational margin.
Merck is aiming to achieve synergies of about €260 million from the acquisition. In addition, the purchase should directly increase earnings per share.
Earlier this year, Merck acquired AZ Electronic Materials, chemical supplier to the electronics industry for €2 billion. Investors appear to approve of Merck’s acqustions strategy. The Merck stock price rose more than 5 percent to an all time high of about €74. With that, the group which reported revenue of 10.7 million in 2013, hit a market value of over the €30 billion for the first time.
Mr. Kley said the acquisition’s biggest appeal is in strengthening Merck in a highly specialized and growing business. The Merck members’ council, which represents the interests of the founding family, and Sigma-Aldrich’s management have already agreed on the deal. But shareholders of the U.S. company and antitrust regulators still need to approve the deal.
Merck estimates that the market for life-science-intermediate products is estimated to be worth around €100 billion and grows annually at about medium to higher single-digit percentages. Clients include academic research laboratories, pharmaceutical and biotech firms as well as a range of other industries.
The acquisition’s biggest appeal was in strengthening Merck in a highly specialized and growing business.
They offer about 300,000 chemicals and products delivered in relatively small, individual quantities. For most chemical companies, it’s a much too small, detailed business; but Merck has established itself in this segment for decades now and recently strengthened its position with the acquisition of the U.S. company Millipore, a maker of lab equipment and chemicals, in 2010 for almost €5 billion.
Merck is prepared to strain its balance sheet for the renewed expansion of its chemical business. It is paying for the €13 billion acquisition with a mix of bank loans, bonds and existing liquid resources. Net borrowing will increase to €14 billion-€15 billion from €2 billion. The rating will fall but will remain within the investment grade area, said Marcus Kuhnert, the new financial chief at Merck. He expects financing costs between 2.5 percent to 3 percent.
More such large acquisitions are unlikely. The group wants to concentrate on debt reduction going forward.
With the recent acquisitions, Merck shifts further in the direction of chemicals and away from the pharmaceutical business. Performance Materials (liquid crystals, electronic chemicals, pigments) and Merck Millipore will this year contribute about half of the Merck group revenue of an estimated €13.8 billion. Merck-Millipore alone is expected to contribute about €4.7 billion.