Germany's Merck to buy Sigma-Aldrich for $17 billion

FRANKFURT (Reuters) - Drugs and chemicals maker MERCK (MRK.NY)KGaA agreed on Monday to acquire U.S. company Sigma-Aldrich for $17 billion in cash to boost its lab supplies business, the biggest takeover in the German group's history.

The deal helps Merck, 70-percent controlled by the descendants of its 17th century founder, to focus on supplying major pharmaceutical companies and academic institutions with chemicals and services.

"With this acquisition we have the opportunity to turn one of our most reliable businesses into a core earnings contributor," said finance chief Marcus Kuhnert.

Merck said it was happy for its own costly and risky drug development business to remain a medium-sized entity.

The deal, which was approved by Sigma-Aldrich's management and needs approval from more than 50 percent of the target's shareholders, will see Merck acquire all shares for $140 apiece in cash, a 36 percent premium over the one-month average closing price, Merck said.

That also represents a 37 percent premium over the latest closing price of $102.37 on Friday, Sept. 19.

Sigma provides big pharma groups including Pfizer and Novartis with lab substances such as cell culture substrates. It also makes high-purity inorganic chemicals for the high-tech sector and food and beverage testing products.

St Louis, Missouri-based Sigma says it is the world's largest supplier of biochemicals and organic chemicals to research laboratories and had 2013 sales of $2.7 billion.

Merck's new Merck Millipore lab supplies business would gain more exposure in North America, which accounts for half of the world's life science market, and to Asia's emerging markets, taking on global players such as Thermo Fisher .

SHARES RISE

Healthcare companies are striking deals at a record pace, with year-to-date activity in the sector topping $380 billion, well over double the year-ago level, according to Thomson Reuters data.

The deal was the second major transatlantic deal for a German company within the space of a few hours after Siemens agreed to buy U.S. oilfield equipment maker Dresser-Rand for $7.6 billion in cash.

Shares in Merck, which initially turned negative on the news, traded up 5.1 percent at 73.18 euros by 1330 GMT, against a 0.3 percent gain in the European chemicals index .

Merck expects the tie-up, funded from about 2 billion euros in cash reserves and new debt, to result in annual synergies of approximately 260 million euros ($334 million), which should be fully realized within three years after closing.

The deal would more than double the lab equipment unit's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) even without synergies. Including synergies, the increase would be 139 percent, based on pro-forma 2013 results.

"The family stands fully behind the conglomerate structure. The fact that they are not taking a big step further into pharma shows that continuous returns on their investment over time are certainly important to the family," said Warburg research analyst Ulrich Huwald.

Merck said the deal would immediately top up adjusted earnings per share and the margin of earnings before interest, taxes, depreciation and amortization (EBITDA) over sales.

Merck, the largest maker of liquid crystals for TV and computer screens, made lab equipment a major pillar of its business when it purchased U.S. group Millipore for $6 billion in 2010.

The combined lab supplies business including equipment would be among the global market's top three, Merck said.

Merck's biggest deal before this one was the takeover of Swiss biotech company Serono, a maker of fertility treatments, for 10.3 billion euros.

Initial bridge-loan financing will be replaced by about 4 billion euros in bank loans and 7 billion euros worth of bonds and strong combined cash flows would allow for rapid deleveraging thereafter.

Guggenheim Securities and J.P. Morgan are advising Merck, together with law firm Skadden, while Morgan Stanley is acting as financial adviser to Sigma-Aldrich and Sidley Austin as legal adviser.

(Additional reporting by Maria Sheahan and Ben Hirschler; editing by Keith Weir)