* Sanofi buys 50 percent of Merial
* Says will boost earnings from first year
* Option to combine Merial, Merck/Schering animal health
* Option valued at least at $9.25 billion
* Price viewed as hefty, shares up 0.2 percent
(Adds bankers, analyst comment, updates stock prices)
By Caroline Jacobs
PARIS, July 30 French drugmaker Sanofi-Aventis
SA(SASY.PA) expanded its animal health business by buying the
other half of Merial from its U.S. partner Merck & Co Inc
(MRK.N) for $4 billion in cash while opening the door for a
They agreed to explore a pet and livestock joint venture
that could be a leader in the $19 billion animal health market,
linking Merial with similar activities at the combined entity
to be formed by the $41 billion merger of Merck and Schering
Plough Corp SGP.N.
The Merial deal was widely expected as Sanofi looks to
diversify its business to become less dependent on classical
pharmaceutical drugs, which are vulnerable to patent challenges
and cheaper generic competition. Merial's prime brands include
the flea and tick product Frontline and dog heartworm
The divestiture by Merck was necessary to win U.S.
regulatory approval for its planned merger with
Schering-Plough. Merck still expects the deal to close in the
Some analysts say Sanofi paid a hefty price to win control
of Merial, which focuses mainly on pet care. Its chief rival in
that area is Fort Dodge, part of U.S. drugmaker Wyeth, which is
being bought by Pfizer.
"Considering they'd be the only likely buyer, they would be
in strong negotiating position, but appear to have paid the
price of a non-partner," Nomura analyst Amit Roy said. "They
should have been able to get a much better price, especially
because Merck was forced to sell Merial."
Morgan Stanley analysts also said the price was above their
expectations, though there were no good comparables against
which to benchmark it.
Merck's takeover of Schering-Plough, owner of Intervet,
would create a dominant position in animal health, requiring
the companies to sell part of that business. Merck aims to
complete the Schering-Plough merger in the last quarter of
The buy-out values Merial on the basis of 3 times 2008
sales and 10.2 times 2008 earnings before interest and taxes,
Sanofi said. Merial sales last year rose to $2.7 billion and
operating profit rose to $785 million, giving a margin of 29.5
"It's not cheap," a Frankfurt-based analyst said. "But the
price raises the value of the 50 percent Sanofi plans to bring
into the new joint venture, so it becomes relative."
Shares in Sanofi, which raised its full-year earnings
growth target on Wednesday after better-than-expected second
quarter results, gained 0.2 percent.
Shares of Merck added 94 cents, or 3.15 percent, to $30.81,
while Schering-Plough was up 44 cents, or 1.6 percent, to
Separately, Pfizer and Wyeth are selling their animal
health businesses, and sources previously told Reuters that
bidders included Germany's Bayer AG and Boehringer Ingelheim
and Switzerland's Novartis.
The price set by the Merial transaction may also set a
higher benchmark for valuing the Pfizer and Wyeth assets,
NEW AND BIGGER JOINT VENTURE
If Sanofi and the new Merck agree to join Merial and
Intervet/Schering-Plough (ISP), the value of Merial would be $8
billion and $9.25 billion for ISP. Any such joint venture would
be subject to antitrust approval.
Sanofi Chief Executive Chris Viehbacher said at a
conference call he saw little duplication in the wider alliance
as Merial focuses on pets and ISP focuses on livestock.
"There is a little bit of overlap, but not very
significant," said Viehbacher. "If we get the opportunity ...
we could end up with a business that is better balanced between
production animals and companion animals," he added.
The $19.2 billion animal health market, two thirds of which
is generated in Europe and the U.S., is expected to grow about
4 percent a year to 2013. Companion animals account for 40
percent of sales.
Sanofi and Merck are also partners in their Sanofi Pasteur
MSD human vaccine business in Europe.
Credit Suisse Group AG CSGN.VX served as the adviser to
Merck, while Evercore Partners advised Sanofi in the deal.
(Editing by James Regan, Marcel Michelson, Will Waterman and