Merck KGaA sells generics unit to Mylan for $6.6 bln

(Adds Mylan CEO comment)

By Mantik Kusjanto and Peter Starck

FRANKFURT, May 13 (Reuters) - Merck KGaA (MRCG.DE) will sell its generics business to U.S. Mylan Laboratories Inc. MYL.N for 4.9 billion euros ($6.6 billion) in cash and plans to use the proceeds for a special dividend and to pay off debt.

The German company said in a statement on Sunday that the agreed-upon deal, which analysts expected to fetch around 4.8 billion euros, was subject to regulatory approval and was expected to close in the second half of this year.

"We have achieved a very good price. We are very pleased," Merck Chief Executive Karl-Ludwig Kley told reporters.

A Merck spokeswoman told Reuters that the company "wants to use the proceeds to pay off debt," which piled up following its 10.2 billion euro purchase of Swiss biotech company Serono last year.

Merck's net debt stood at 5.5 billion euros at end-March.

With 2006 sales of 1.8 billion euros, Merck's generics unit ranked fourth in the world behind Israel's Teva Pharmaceutical Industries (TEVA.O) (TEVA.TA), Swiss Novartis AG's (NOVN.VX) Sandoz unit and U.S. Barr Pharmaceuticals Inc. BRL.N.

Kley said the company would regain its financial flexibility following the sale of the generics business, which has a book value of less than 1 billion euros.

"This transaction will allow Merck to focus its resources on further growth within its Pharmaceuticals and Chemicals business sectors," he said, adding investors can expect a dividend from the deal, as in the past deal at the company.

GLOBAL FOOTPRINT

Mylan said in a separate statement that the combination would create "a vertically and horizontally integrated generics and specialty pharmaceuticals leader with a diversified revenue base and a global footprint."

Mylan, which edged out Teva and Iceland's Actavis ACT.IC to snatch the deal, is buying a business with operations in 90 countries and limited overlap with its own activities. Mylan Chief Executive Robert Coury told Reuters the company was not overpaying for the generics assets.

"Absolutely not. It's a one of a kind, literally one-of-a- kind opportunity," Coury said, when asked if the company has paid too high a price.

Coury said the deal would save the company from making many smaller acquisitions to reach the scale that the Merck's unit was offering and thus reducing integration risks.

"In this case, by paying for a fairly high quality one-time pristine asset, I am able to achieve all the scale necessary in all the areas that are important to compete in the generics pharmaceutical space," he added.

"Basically what I have delivered to my shareholders is a derisking strategy to achieve the scale."

On a proforma basis, the combined company would have had revenue of about $4.2 billion and a gross profit, or EBITDA, of about $1.0 billion in 2006, Mylan said.

At 4.9 billion euros, Mylan is paying about 2.7 times last year's sales of the generics unit, roughly the same multiple that Germany's Stada (STAGn.DE) paid for Hemofarm last year and higher than Barr's acquisition of Pliva at 2.5 times.

Mylan, which is suspending its dividend, said Merrill Lynch MER.N, Citigroup (C.N) and Goldman Sachs (GS.N) would help finance the deal, and it would issue up to $2 billion of equity and equity-linked securities to lower its debt in the near term.

The generics business of Merck makes branded drugs like EpiPen for treatment of life-threatening allergic reactions, and DuoNeb for treatment of smokers' lung.

The global generic, or non-patented, drugs business has seen a wave of mergers and acquisitions recently, as companies seek increased scale and geographical reach. The Merck business, which is no longer core to the German company after its acquisition of Serono, is seen as a prized asset because of its foothold in many markets. It was sold debt free.

Teva, with sales of $8.4 billion in 2006, had been among the potential buyers of Merck's generics business. It said in a statement on Sunday that it stopped pursuing a deal because the terms did not fully meet its investment criteria.

(Additional reporting by Noah Barkin in Berlin and Steven Scheer in Jerusalem)

($1=.7421 Euro)

((Editing by Rory Channing and Maureen Bavdek; frankfurt.newsroom@news.reuters.com; Reuters Messaging: peter.starck.reuters.com@reuters.net; +49 69 7565 1217)) Keywords: MERCK MYLAN/

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