UPDATE 4-Sanofi buys rest of Merial from Merck for $4 bln

* 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 (Reuters) - French drugmaker Sanofi-Aventis SASASY.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 bigger partnership.

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 prevention Heartgard.

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 fourth quarter.

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 2009.

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 percent.

“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 $26.98.

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, analysts said.


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 Gunna Dickson)