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September 22, 2014

Merck KGaA to Acquire Sigma-Aldrich for $17B

Source: © Yuri Arcurs - Fotolia.com

  • Merck KGaA plans to acquire Sigma-Aldrich for $17 billion, in a deal that both companies said will more than double the acquirer’s presence in life sciences tools and technologies by expanding upon and complementing the operations of the German giant's Merck Millipore tools subsidiary.

    The deal expands Merck Millipore by multiplying its 60,000 products and solutions with the more than 230,000 chemicals, biochemicals, and other essential products Sigma-Aldrich manufactures and distributes to more than 1.4 million customers globally in research and applied labs, as well as in industrial and commercial markets.

    Another reason why Sigma-Aldrich proved attractive to Merck: Its eCommerce platform, which offers 24-hour delivery in major markets. During a presentation of the deal to analysts this morning, Merck KGaA cited in part the “opportunity to leverage [the] eCommerce platform,” and offered as its sources of future savings from the deal “increased conversion to eCommerce channels,” which will help the company “optimize sales and marketing.”

    The companies said the combination will enable Merck Millipore to increase its presence in North America—and perhaps more importantly, add a presence in Asia as R&D and manufacturing continue to expand worldwide.

    “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,” Karl-Ludwig Kley, Merck KGaA’s chairman of the executive board, said in a statement. “This transaction marks a milestone on our transformation journey aimed at turning our three businesses into sustainable growth platforms. For our life science business it’s even more than that: it’s a quantum leap.”

    Based on 2013 results, Merck KGaA said, the combined company will have tools/tech sales of €4.7 billion (about $6.1 billion)—up 79% from the € 2.645 million ($3.4 billion) in last year’s sales for Merck Millipore alone—and combined EBITDA pre (earnings before interest, taxes, depreciation, and amortization before one-time items) of €1.5 billion ($2.0 billion), more than double with an increase of 139%.

    For all of Merck KGaA, the addition of Sigma-Aldrich is expected to add 19% to annual sales, and 24% to EBITDA pre. The latter percentage would rise to 33% when annual cost-cutting savings or “synergies” are included.

    Sigma-Aldrich finished last year with $2.7 billion in sales and 9,000 employees in 37 countries worldwide, compared with €11.1 billion (almost $14.3 billion) in sales and 39,000 employees in 66 countries for Merck KGaA. That workforce includes 10,000 Merck Millipore staffers, of which 600 hold R&D positions.

    Merck KGaA said it expects to achieve annual synergies of about €260 million ($340 million), which it said should be fully realized within three years after the deal closes. That closing is expected to occur “mid-year” 2015 subject to regulatory approvals and other customary closing conditions, the companies said.

    Synergies, according to Merck KGaA, will not come by shutting down the combined entity’s major operations hubs. The companies said they “plan to maintain a significant presence” in its largest markets—which include Sigma-Aldrich’s headquarters city of St. Louis; Merck KGaA’s U.S. R&D hub in Billerica, MA; and subsidiary EMD Millipore’s sites in Molsheim, France, and Darmstadt, Gemany, where Merck KGaA is based.

    The Sigma-Aldrich acquisition is now Merck’s largest deal ever, eclipsing the €10.3 billion ($13.2 billion) acquisition of the former Swiss-based biotech Serono SA in 2007. Three years later, Merck acquired Millipore for $6 billion, with the goal of broadening its life-science operations beyond pharmaceuticals, which it develops and markets through what is now its Merck Serono subsidiary.

    “The deals seems like a natural fit to us and takes Merck deeper into biology, with the Sigma business fitting well with Merck’s legacy chemical businesses and the acquired Millipore business,” Mizuho analysts Peter Lawson, D.Phil.(Oxon.), and Eric Criscuolo wrote in a note to investors.

    Until now, Merck Serono accounted for the majority of Merck KGaA sales with 58%, followed by 39% from its second-largest source, its performance materials business, whose offerings include the liquid crystals used in TV and computer screens. However, Merck Serono has failed to win approval for a blockbuster new drug since 2003.

    That may reflect Merck Serono’s focus on specialty care—a direction that the president of the subsidiary’s North American unit EMD Serono, Paris Panayiotopoulos, told The Boston Globe in April the subsidiary was committed to maintaining. As of then, Merck KGaA had about 4,700 U.S. employees between its Millipore and Serono units—of which 2,200 were based in Massachusetts

    Merck also owns life sciences research tool supplier EMD Millipore in Billerica. Together, they have in the U.S., including 2,200 in Massachusetts, where last year, Merck KGaA disclosed plans to expand EMD Serono’s U.S. workforce about 20% this year by expanding its Billerica site, located about 25 miles northwest of Boston.

    Merck KGaA said the deal would immediate add to its earnings per share, both before and after accounting for EBITDA.

    At $140 per share, Merck KGaA’s offer represents a 37% premium above Sigma-Aldrich’s $102.37 closing price on Sept. 19, and a 36% premium above Sigma-Aldrich’s one-month average closing price. Merck said it secured bridge financing for the all-cash acquisition, which the company expects to pay for through a combination of bank loans and bonds, as well as cash on its balance sheet.

    The deal has been unanimously approved by Sigma-Aldrich’s board of directors, with shareholders of that company to be presented the deal for approval at a future special meeting. The transaction will not require a Merck KGaA shareholder vote given support for the deal by both the company’s executive board and the board of partners of E. Merck KG—general partner holding the 70% share of company ownership held by the founding Merck family stretching back to 1668. 

    Sigma-Aldrich’s president and CEO Rakesh Sachdev recently appeared in GEN’s List of Top 10 CEO Salaries: Biotech Tool Providers, with a total compensation of $10,516,805 in 2013.

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