Merck will gain a significant foothold outside the U.S.

Merck & Co. and Schering-Plough are combining businesses in a deal valued at $41.4 billion. Merck shareholders are expected to own approximately 68% of the combined company. The new company will benefit from combinations particularly in cholesterol management, respiratory diseases, and biologics.

The transaction will double the number of potential medicines Merck has in Phase III development, bringing the total to 18. It will also have expanded opportunities for life-cycle management through the introduction of potential new combinations and formulations of existing products.

“We are creating a strong, global healthcare leader built for sustainable growth and success,” comments Merck chairman, president, and CEO Richard T. Clark, who will head the firm. “The combined company will benefit from a formidable research and development pipeline, a significantly broader portfolio of medicines, and an expanded presence in key international markets, particularly in high-growth emerging markets.”

Schering-Plough generates about 70% of its revenue outside of the U.S., including more than $2 billion in annual revenue from emerging markets, according to Merck & Co. This will accelerate Merck’s efforts to acquire top-five market share in targeted emerging markets. In addition, the combined company is expected to generate more than 50% of its revenue outside the U.S.

Merck says that the transaction will be modestly accretive to non-GAAP EPS in the first full year following completion and significantly accretive thereafter. The new entity will have a cash and investments balance of approximately $8 billion. Merck also expects to achieve cost savings of approximately $3.5 billion annually beyond 2011.

The transaction is to be structured as a reverse merger. As a result, Schering-Plough will be the surviving corporation but will take the name Merck. The aggregate consideration will be composed of a combination of approximately 44% cash and 56% stock. The cash portion will be financed with a combination of $9.8 billion from existing cash balances and $8.5 billion from committed financing to be provided by J.P. Morgan.

Schering-Plough shareholders will receive 0.5767 shares and $10.50 in cash for each share. Based on Merck’s closing price on March 6, the consideration to be received is thus $23.61 per share. This represents a 34% premium to Schering-Plough shareholders. The firm opened trading today at $19.81.

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