Healthy Skepticism Library item: 82

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Publication type: news

Raghavan A, Naik G
A Tie-Up of Aventis, Sanofi Could Create Strong Global Rival
The Wall Street Journal 2004 Sep 23

Full text:

The stocks of Sanofi-Synthelabo SA and Aventis SA jumped Thursday as investors scrambled to bet on a merger between the two French drug giants, a move that could herald another round of matchmaking on the European pharmaceutical scene.

Meanwhile, Novartis AG, based in Basel, Switzerland, disclosed that it had increased its stake in hometown rival Roche Holding AG to 33.3% from 32.7%. The move means Novartis is now at the threshold at which any further increase in its stake will require it to make a full-blown offer for Roche. But a hostile bid for Roche seems unlikely, at least for now, given Switzerland’s genteel corporate culture. Novartis Chief Executive Daniel Vasella has previously stressed that he would prefer a friendly deal, and a spokesman for Roche said its controlling family and executive board want it to remain an independent company.

In their desire to better compete with titans such as Pfizer Inc. of the U.S. and GlaxoSmithKline PLC of Britain, Europe’s midsize drug companies are increasingly keen to bulk up, especially to target the lucrative U.S. market. Pharmaceutical giants are under pressure from expiring patents, a sharp decline in research and development productivity, and political pressure to reduce health-care costs. Novartis has made clear its desire to become a bigger player in the U.S.; similarly, an Aventis-Sanofi combination would create a formidable French rival among global drug makers.

While an Aventis spokesman said the company isn’t in discussions with Sanofi, investors are clearly banking on a possible merger. In Paris trading Thursday, Sanofi shares rose 3.4%, or €2.05, to €62.05 ($2.59 to $78.38) and Aventis shares gained 5.2%, or €2.80, to €56.60. At 4 p.m. in New York Stock Exchange composite trading, the American depositary shares of Sanofi were up $1.74, or 4.6%, at $39.85 and those of Aventis were up $3.09, or 4.5%, at $71.59.

It’s no secret that for the past two years, Aventis and Sanofi, with some prodding from the French government, have held on-and-off merger discussions, say people close to both companies.

“This merger will happen eventually, and that’s why you own the stock,” says Markus Manns, portfolio manager at Union Investment in Frankfurt, which manages €110 billion in assets and owns sizable positions in Aventis and Sanofi.

In addition, Total SA, which owns a 24.4% stake in Sanofi, is now actively pushing the company to merge with Aventis and is even floating the idea that Sanofi consider a hostile takeover of Aventis if the company isn’t open to a friendly tie-up, say people familiar with the situation. Total declined to comment. Total transformed itself into an oil titan by making a hostile run at Elf Aquitaine SA in 1999, and some in Paris are dubbing the Sanofi-Aventis dance Total-Elf.

But L’Oreal SA, which owns a 19.5% stake in Sanofi, isn’t eager for a merger because its stake would be diluted in any deal and it would no longer be able to incorporate 19.5% of Sanofi’s annual earnings into its own profit statement. Under accounting principles, a company can include its portion of the earnings of an affiliate if it has a sizable stake in the affiliate and significant influence.

In a conference call to discuss its 2003 sales data, released earlier in the day, Sanofi Chief Financial Officer Marie-Helene Laimay, responding to reports in European newspapers that a merger between the two drug companies was imminent said: “I refer you to our [recent] statement that we continue to evaluate any transaction that might consolidate our medium- and long-term future, but we have no comment to make on rumors.” On Jan. 16, in response to a request by the French stock-market regulator amid rampant merger speculation, Sanofi said it isn’t engaged in any merger negotiations, leaving the market to speculate that the company was examining a possible hostile takeover of Aventis.