Bloomberg BusinessWeek is tonight reporting a plain rumor piece -- claiming that Bayer AG is in exclusive talks with Merck, to get the Consumer Health assets, (perhaps) by offering a swap of some assets with Merck. The idea would be that Bayer's smaller Animal Health assets would be additive to Merck's, and would be used to reduce the cash outlay needed to get the Merck OTC assets. There is talk of a JV [a la Merial 2009-2011, anyone?]. There is also talk of at least some of the very-mature, late in life cycle branded Merck pharma assets going to Bayer in the deal. [Thanks go to our commenters, on that!]
And this is where the older rumors -- of a north of $10 billion deal, start to make some semblance of financial sense. For as we now learn, it is not just Consumer Health -- with some $1.9 billion in annual sales. While valuing a swap might create a window for some "creative accounting" -- and thus an inflated price to be claimed by Whitehouse Station, I continue to maintain that when we add all the annual revenue streams, of the aggregated businesses to be sold by Merck, the all-in net price will be close to three times that number. And possibly a little less (certainly not much more), especially if a lot of older branded drugs are in the departing mix.
Where the valuation will "go a little fuzzy" will be the dollar figures assigned to (conjured, truthfully) incoming Animal Health assets -- from Bayer. We will have to look closely to see if any debt is being assumed by Merck, and what other liabilities come along with those incoming Animal Health assets. In the EU, assuming severance liabilities for employees of the incoming business will be much larger -- perhaps even double what they would be -- on a per person basis, in the US. So watch for that -- Merck agreeing that any redundancies (separation payments) will be on its tab, in the combined (swapped) Animal Health businesses in Europe -- that would be a big bogie that would belong to Merck.
In any event, here's a bit from the MSM rumor story -- do go read it all:
. . . .An announcement is likely to come in the next few days, said the people, who asked not to be identified because the talks are private. While the two sides have agreed to a deal in principle, they are still working out details and haven’t formally reached an agreement, the people said. The terms would include cash and an exchange of pharmaceutical assets, possibly structured as a joint venture, the people said.
A deal would strengthen Merck’s core drug business while helping Bayer to beef up its consumer-products line by adding brands including Claritin allergy relief. It would be similar to other recent pharmaceutical transactions, in which companies have sold weaker business lines and added to areas where they are more competitive. . . .
So, again -- if the rumor proves accurate -- what has happened is that the size of the assets have more than doubled, from what was a pure consumer health play, in the original iteration. And now it makes sense that Reckitts would push away, as it likely only ever wanted pure play OTC in the first place -- and wanted it at closer to $6 billion -- than a whole schmear -- with a bunch of assets it would need to turn around and resell, in order to recoup $8 billion or $ 9 billion of the price it paid. Now it is all coming into sharper focus, indeed. I'll be scarce this weekend -- at the Derby.
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