Roche offers $20 billion for Bayer drugs unit

New York/Zurich, Aug 28: SWISS healthcare giant Roche Holding AG has approached German rival Bayer AG with a preliminary proposal to buy its drugs business for around $20 billion, people familiar with the situation said.

Bayer shares advanced more than four per cent on the news in early trading on Tuesday, while Roche certificates — its most widely traded form of equity — slipped nearly two per cent.

Roche and Bayer had no comment on what they described as “speculation” about such an offer. It follows an initial advance by Roche last year that Bayer rebuffed, the sources said.

In the latest approach, Roche is offering a mixture of stock and cash in exchange for the business.

Sources familiar with the offer said Bayer, which recently suffered a severe setback because it had to withdraw its anti-cholesterol drug, Baycol, had not yet responded to Roche’s plans and was expected to discuss the proposal at a supervisory board meeting on September 13.

Earlier this month, Bayer chief executive Manfred Schneider said it had received overtures from two companies to buy its drug business. He did not name them at that time.

Bayer, the inventor of aspirin a century ago, is examining its strategy for its drugs business after it was forced to pull Baycol on August 8 due to potentially fatal side effects.

Investment bank Credit Suisse First Boston and Deutsche Bank are helping Bayer on its strategy.

Financial analysts gave mixed reviews to the reported offer.

Mr Michael Vara, chemicals analyst at Commerzbank in Frankfurt, said a Roche swoop on Bayer’s drug business was “certainly not an unrealistic scenario” because Roche was seen as one of the top candidates to bid for or merge with Bayer pharmaceuticals. “The price is considerably higher than it was rumoured that Glaxo were bidding for the pharmaceutical assets, which was seen by us to be a very low price. This is a more realistic price for Bayer’s pharma assets and it certainly is going to support the stock” he said.

Swiss analysts were more sceptical about the logic behind any such deal and found it hard to believe the Hoffmann and Oeri families that now control a majority of Roche’s voting rights would give that up by using stock to buy Bayer’s drug business.

They said Roche could easily finance a $20 billion purchase without changing its capital structure that gives the families 50.1 per cent of the votes although they have only around 10 per cent of the equity by market capitalisation.

“The conditions mentioned don’t make much sense,” said Ms Birgit Kulhoff, an analyst at Lombard Odier, although like many other companies, Roche would find parts of Bayer’s business attractive, she said. “The OTC (non-prescription) business would be very interesting, but that probably goes together with the rest, I would assume if I were Bayer. So I would say the probability of this happening soon is rather low,” she said.

Ms Denise Anderson at Bank Julius Baer said a Bayer deal would not boost Roche’s presence in the key US market and do little to boost its flagship drugs business in the medium term.

Stripped of its cholesterol drug, Bayer has a slow-growing drugs business whose leading product is an antibiotic, an area Roche says it wants to exit, she noted.

“Their margins are bad, so to me it’s like a mini-Roche,” she said, citing Bayer’s relatively small portfolio of ageing drugs. “On the one hand, Roche is really in a quandary. They want acquisitions but there is really not much to acquire any more. But to just buy this, to me smacks of desperation,” she said.

Roche bearer shares, which have full voting rights, have lost 30 per cent of their value this year but have recovered a bit from their 2001 low at 128 swiss francs to close on Monday at 139.75. They slipped to 138.50 in early trade on Tuesday. They trade at a 13 per cent premium to Roche non-voting participation certificates, which have shed around 25 per cent this year to trade around 122.50 on Tuesday, down 1.8 per cent. The spread between the two sorts of equity has narrowed sharply this year, triggering talk that Roche could adopt a single class of equity before a big strategic deal.

The families have said they are willing to give up their outright control over Roche and agree to a simplified capital structure if the right strategic opportunity came along.

Talk of a potential Roche merger with Novartis AG gained pace when its crosstown Basel rival acquired a 20 per cent voting stake from disgruntled investor Martin Ebner in May. This heightened speculation that Roche could come under increasing pressure to make a deal amid below-average sales growth at its flagship drugs division.

Analysts say the question remains whether and how long the Hoffmann and Oeri families are ready to back the company’s strategy, while Roche slides into the second tier of global pharmaceutical companies.

(Reuters)