Breakingviews on Twitter
Search League Tables

Friday, 24 October 2014

Bayer buy 

Tax steroids justify Bayer's $14 bln Merck deal

Bayer’s $14.2 billion acquisition of Merck’s consumer care business is less pricey than it looks. Non-prescription pharmaceuticals are among the most sought-after assets in global healthcare. Demand for “over the counter” drugs, driven by emerging markets, is growing at 4 percent to 5 percent a year. Revenue is unthreatened by patent cliffs and less vulnerable to regulatory interference. Strong OTC brands earn EBITDA margins of 30 percent and more.

That partly explains why Bayer has paid a heady multiple of 21 times the acquired EBITDA. Quoted healthcare companies on both sides of the Atlantic trade on EBITDA multiples of around 13 times, though data from bankers working on the deal suggest Bayer paid a little less than the average of recent comparable transactions.

Synergies help square the circle. Bayer expects to squeeze annual costs by $200 million or 2.6 percent of combined revenue by 2017. Taxed and capitalised, those might be worth about $1.5 billion. The Leverkusen-based group also reckons on annual revenue synergies of $400 million. Merck has a relatively small footprint outside the United States and Bayer can utilise its own distribution channels to pump up ex-U.S. sales. The $14.2 billion purchase price starts to look more reasonable if, and it is an “if”, one assumes these benefits have a net present value of $3 billion.

Bayer will also spend around $500 million, in one-off costs, in the hope of winning the cost and revenue synergies. But the picture improves further if tax breaks are taken into account. Tax benefits are now commonly used to justify pharma M&A. Here, Bayer reckons it can take advantage of the gap between the tangible value of assets acquired and the actual price it paid. Discounted at an annual rate of 5 percent, the net present value of the total tax rebate could be worth as much as $3.3 billion.

If Bayer bags all these gains the Merck purchase price could prove a bargain. It is more likely that, at best, Bayer has paid a full price rather than a ridiculous one.

Have your say

To have your say, you have to be signed in

Context News

German drugmaker Bayer has agreed to acquire Merck’s consumer care business for $14.2 billion. The deal will make Bayer one of the largest providers of over-the-counter products, giving it control of several well-known brand names, including Claritin, Coppertone and Dr. Scholl’s.

“This acquisition marks a major milestone on our path towards global leadership in the attractive non-prescription medicines business,” said Marijn Dekkers, the Bayer chief executive.

Bayer also entered into a codevelopment agreement with Merck related to the treatment of cardiovascular diseases. Merck will make an upfront payment to Bayer of $1 billion as part of the agreement, to be followed by additional payments of up to $1.1 billion for achieving sales milestones.

Shares in Bayer lost 0.9 percent on May 6. Last month, the Swiss pharmaceutical giant Novartis and GlaxoSmithKline of Britain agreed to swap more than $20 billion in assets, including combining Novartis’s over-the-counter pharmaceutical business with Glaxo’s consumer drug business.

(Launches in a new window)