Merck Wants to Swallow Schering in Hostile Takeover

German pharmaceutical company Merck said Monday it was launching a hostile bid worth 14.6 billion euros ($17.4 billion) to buy Berlin-based rival Schering and become one of Europe's leading drug makers.

Schering, a world leader in contraceptives and fertility drugs, turned down Merck's advances, saying the offer price "significantly undervalues" its business.

Merck, which already holds a stake of 4.98 percent in Schering, said in a statement it was making a cash offer of 77 euros per share "with the goal of combining the two companies to create a world-class pharmaceuticals and chemicals company with combined annual revenues of 11.2 billion euros."

The offer price represented a premium of 35 percent over the average price of Schering shares during the three months before Merck made known its intentions and a premium of 15 percent over the closing price of Schering shares last Friday.

Merck chairman Michael Roemer said a tie-up with Schering would allow both companies "to take a quantum leap and become more competitive and continue to thrive in the consolidating global pharmaceuticals industry."

Same size, different niches

The combined company would have a research and development budget of 1.3 billion euros, an enhanced product pipeline and the increased sales reach to launch new products in the key markets of the United States and Japan, Merck argued.

Both Schering and Merck are of a similar size, but while Merck specializes in generic drugs and cancer treatment via its best-selling Erbitux drug, Schering is a world leader in fertility drugs.

A tie-up would create economies of scale of 500 million euros each year from 2009 and it would boost earnings by more than 10 percent even without taking those synergies into account, Merck said.

No objections expected

Merck said it did not expect any objections from the competition authorities. And it had no intention of breaking up Schering or selling off its own chemicals activities, especially its profitable liquid crystals business, should the merger go ahead.

The combined group would be one of the biggest pharmaceuticals companies in Germany and would rank number 14 in the world. Merck currently ranks number 22 and Schering number 18 and analysts believe Merck is too small to survive on its own.

Roemer said he hoped Merck's management and supervisory boards would recommend that the shareholders accept the offer.

"Irrespective of the management board's recommendation, the decision to accept our offer lies with the shareholders," he said. "We are confident that they will consider this offer, which represents full and immediate value as attractive."

Schering feeling undervalued

For its part, Schering said Merck's offer "significantly undervalues Schering and its prospects as an independent specialized pharmaceutical company."

Merck's approach was "unsolicited" and "no negotiations are ongoing with Merck," Schering said.

Merck said it would initially finance the deal via cash and bridge loans. But the total sum of 14.6 billion euros "will be refinanced through a combination of existing funds, debt and equity," it said.

Merck would undertake a capital of increase of between 500 million euros and 4.0 billion euros, as well as a one-billion-euro equity contribution via the Merck family.

Pharmaceutical expert put in charge

Merck said that it had appointed Karl-Ludwig Kley, currently chief financial officer of German flag carrier Lufthansa, as its deputy chairman to oversee the integration of Schering.

Kley was former head of corporate finance and investor relations at pharmaceuticals giant Bayer, is already a member of Merck's supervisory board and a member of the advisory board of E. Merck OHG, the company that oversees the 73-percent stake held by the Merck family in Merck KGaA.

"With his extensive background in the pharmaceuticals industry, as well as his experience in responsible positions at two leading German companies, Kley is well-equipped to create a major German pharmaceuticals and chemicals company," said the chairman of the advisory board of E. Merck OHG, Frank Stangenberg-Haverkamp.

Investors appeared to believe Schering would become the target of a takeover battle in which the purchase price would be driven much higher.