Germany’s Merck KGaA said on Monday it had agreed to sell its U.S.-based VWR laboratory products distribution unit to private equity firm Clayton, Dubilier & Rice for $1.68 billion in a move that could transform its business.
Merck said the divestment — which analysts had expected to fetch between one and 1.2 billion euros ($1.3-1.5 billion) — would raise funds for acquisitions and improve profit margins as it reduced sales by a third and operating profit by 10 percent.
The drugs and chemicals group said that excluding pension provisions, it would be almost free of debt after the sale.
Chief Executive Bernhard Scheuble told a news conference the company would make a net profit of $240 million on the deal, and would look to buy generic drugs companies and licences for prescription drugs.
“We can afford a lot as per our present balance sheet,” he said when asked about the size of Merck’s acquisition war chest. “It’s a question of what we want. In generics, we will certainly look around.”
He told Reuters Merck would focus on Europe and Asia for its generics acquisitions. He said he would look at top European generics player Ratiopharm if it were up for sale, though he felt Ratiopharm’s controlling family would not sell.
He said Merck was well positioned to be number one in generics in Japan.
Analysts said both the fact VWR’s sale had occurred and the price it had fetched were positives for Merck.
“It’s a good price -- this will help margins and reduce net debt,” said WestLB analyst Andreas Theisen.
Sal. Oppenheim said the sale would improve the character of Merck’s business and could also be earnings enhancing, given the unit’s low profit margins. VWR made a fourth-quarter operating profit of 19 million euros on sales of 586 million euros.
Merck said that if it excluded VWR from its 2003 results, operating margins would be more than 13 percent, compared with 10 percent including the VWR results.
Reuters had reported on Friday that Merck was nearing a deal to sell the Pennsylvania-based lab products distributor. Scheuble said the deal could be completed as early as the end of the first quarter.
News of the disposal and strong fourth-quarter results lifted shares in Merck by as much as 4.4 percent. At 1601 GMT, they traded up 2.8 percent at 38.51 euros, outperforming the mid-cap MDAX index.
The stock has gained 25 percent since October, driven by hopes for its liquid crystals and anti-cancer drug Erbitux, and the prospect of a VWR disposal.
Clayton, Dubilier & Rice partner Richard Schnall told Reuters VWR would grow internally and by acquisitions, and that it could be a “very attractive” public company in three years.
Bear Stearns advised Merck. Citigroup and Deutsche Bank advised Clayton, Dubilier & Rice.
Results top forecasts
Merck said its fourth-quarter operating profit excluding exceptionals came in at 182.8 million euros, beating the consensus of estimates on the back of a strong showing in liquid crystals used in flat screens, cellphones and laptop computers.
Scheuble told the conference that he expected net profit to grow by a double-digit percentage in 2004.
Quarterly sales were roughly flat at 1.8 billion euros.
Sales of liquid crystals rose nearly 26 percent to 136.7 million euros, and sales of generics, part of the group’s pharmaceuticals business, rose 12 percent.
The company has been hit by generic competition to diabetes treatment Glucophage and lower royalties from a marketing deal with German rival Schwarz Pharma.
Erbitux has so far been Merck’s main hope, but Scheuble said he also expected sarizotan, a drug used to treat uncontrolled body movements in Parkinson’s disease patients and slated for a 2007 launch, to reach peak sales of around 500 million euros.