In demand

Frankfurt, March 13 (Reuters): German drugs and chemicals group Merck said on Monday it will offer 14.6 billion euros ($17.4 billion) in cash for domestic rival Schering, marking the first big all-German consolidation step in the industry.

Merck confirmed it was making an offer at 77 euros a share, a 15 per cent premium to Schering’s share price on Friday. Schering said on Sunday that it had been told of the offer, but felt the price undervalued the company.

The offer sent shares in Schering up 25 per cent at the open, and Merck stock down nearly 3 per cent, on fears that it was overpaying for its Berlin-based rival.

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 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 growth drivers for Schering beyond 2008 because of its weak pipeline of new drugs.

“Merck’s paying 21.4 times our 2006 earnings estimate for Schering, against an average of 18 times for the sector,” he said.

If it goes through the deal would be the first step in the consolidation of Germany’s pharmaceuticals industry since the 1998 merger of Hoechst with France’s Rhone-Poulenc to create Aventis, since bought by Sanofi to make Sanofi-Aventis.

“We can say that Schering is our first choice,” Merck’s supervisory head Wilhelm Simson told a conference call, adding that there were no plans to break Schering up or get rid of its Berlin headquarters.

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, increasing its 2005 figures by more than 10 per cent, even without synergies, it said.

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.