(The following statement was released by the rating agency)
NEW YORK, May 06 (Fitch) The sale of Merck's consumer products
increase the company's focus on its core mission of developing
innovative medicines, according to Fitch Ratings. German-based
Bayer AG Tuesday
said it planned to buy Merck's consumer health unit for $14.2
The transaction is consistent with Fitch's expectation that a
number of major
pharmaceutical companies will continue to consider divestitures
that are not core to a business model focused on biomedical
innovation. This is
particularly relevant to firms such as Merck who have
pipelines that are expected to support long-term growth.
The consumer business only accounts for approximately 4% of
Merck's total sales,
and Fitch estimates the segment's EBITDA margin is less than
that of the
pharmaceutical business and the total firm. Nevertheless, the
of diversification and EBITDA would be marginally negative for
profile. We view the $14.2 billion cash sale as incrementally
negative for the
company's credit profile, with the expectation that the proceeds
of the sales
would not be used for debt reduction, but rather to fund
shareholders and business development activities, including
While the transaction will significantly increase liquidity, the
modest estimated loss of EBITDA will further stress gross debt
1.65x, which is currently high for the company's current 'A+'
Fitch looks for Merck to maintain adequate liquidity through
generation and ample access to the credit markets. FCF for the
LTM ending Dec.
31, 2013, was $8.35 billion. At the end of the period, Merck had
$17.5 billion in cash plus short-term investments and full
availability on its
$4 billion revolver maturing in May 2017.
At Dec. 31, 2013, Merck had roughly $24.6 billion in debt
outstanding, with $4.7
billion maturing in 2014, $2 billion in 2015, $2.3 billion in
2016 and $1
billion in 2017. Fitch expects near- to midterm maturities will
primarily through refinancing in the public debt markets.
Fitch rates Merck 'A+' with a Negative Rating Outlook, and a
downgrade of the
ratings could stem from total debt leverage remaining above 1.5x
intermediate term. The high leverage could be driven by
incremental borrowing to
fund acquisitions or share repurchases; although incremental
by the cash proceeds from the sale of the consumer health
this concern in the near term. Leverage pressure could also
operational weakness due to an inability to achieve
cost-containment targets or
by generating sales growth despite an improving patent risk
profile and an
expanding late-stage pipeline.
Robert Kirby, CFA
+1 312 368-3147
Fitch Ratings, Inc.
70 W. Madison
+1 212 908-0501
+1 212 908-9123
33 Whitehall St.
New York, NY
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
The above article originally appeared as a post on the Fitch
Wire credit market
commentary page. The original article can be accessed at
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