Analysis: Hoechst, R-P to go when chems sold

01 December 1998 18:49  [Source: ICIS news]

LONDON (CNI)--The death knell for Germany's Hoechst and France's Rhone-Poulenc (R-P) as separate entities was sounded Tuesday by chairmen Jurgen Dormann and Jean-Rene Fourtou when they unveiled their 50:50 life sciences merger Aventis, which one analyst told CNI reduces them to mere "disposal operations" for the chemicals businesses.

"The only reason for them to continue as independent companies is because of the 'tack-on' chemical companies," he said.

The two big names are expected to live on for another two to three years as Aventis is established from mid-1999. Stocks in both Hoechst and R-P will continue to be traded and, to secure completion of the two-stage merger into Aventis, the chairmen warned that they would "work together" to see off any financial attack on either company. "The best defence is attack and to develop [Aventis] as quickly as possible," a Strasbourg conference on the merger plan was told.

However, while plans for the first stage of the merger are well advanced, the companies said that they have not yet addressed the issues in the second stage, such as corporation tax or shares. Dormann said that European Union legislation could help by making it possible to set up a European stock corporation and so resolve problems of taxation and co-determination.

The companies also said that the final solution to the share split for Hoechst and R-P shareholders may depend on the divestment revenue from the chemicals businesses. The revenue may mean "a prior readjustment of finances" based on latest turnover figures, said Fourtou. Options for uses of the money including giving it to shareholders, buying back shares or giving additional dividends to shareholders before the companies are subsumed into Aventis. However, as Hoechst and R-P do not have equal amounts to sell-off, according to the analyst there is a slim possibility that the money could end up going into Aventis and slightly shifting the balance of ownership away from equality.

"An unequal final merger is possible," said the analyst, though he doubted that it had any bearing on why the merger is in two stages. The first stage of Aventis merger takes up the life sciences, which are more than 80% of the companies' market capitalisation, and the analyst said that meant any effect on ownership from equity injections would be "at the margins". He also said there is also a question of who could benefit as all resources are to be pooled into a single entity, as it appears at this stage.

Another analyst, Marcus Rausch, who covers pharmaceuticals with Morgan Grenfell, speculated that the 50:50 ownership split will remain. He believes that Hoechst, with more to sell, would give money to shareholders.

The equal split in ownership resulted from a careful balancing of assets from Hoechst and R-P to put into the melting pot, he said. The moves left HR Vet out of the merger because of "overlap" with R-P's stake in Merial, its animal health joint venture with Merck. Having established equal asset values, they both assigned equal debt ($7bn) to Aventis. The analysts said the 50:50 deal is no great surprise although it was not automatic.

Dormann said the two stage merger was an interim structure needed because of tax and legal issues as well as the need to dispose of chemicals operations. He said that Hoechst's investment of 50% or less could not be transferred at book value in the merger because of tax liability. "In addition, there are different partners in industrial businesses and joint ventures that would obtain a shareholding in a fully fledged Aventis although they are not focused on the life sciences."

The chairmen plan Aventis to be an integrated European operation that targets US markets, which already accounts for 25% of its life sciences sales and is seen as the main vehicle for rapid growth. The new subsidiary Aventis Pharma plans to increase its number of US sales representatives by 500 to 4000 very soon to push market share. The other subsidiary, Aventis Agriculture, aims to grab at least 10% of the key Midwest market.

As well as growth helping to increase profitability, Aventis is to rationalise both its products on sale and under development, cuts costs, initiate a redundancy programme, and being headquartered in Strasbourg it will benefit from the French tax regime. While cost cutting is expected to produce savings of some $1.2bn over three years, no estimate is available on the scale of job losses. However, the cash restructuring charge of the merger, covering items such as redundancies, is expected to be around $2bn and is to be reported in Aventis' first year accounts.

Aventis is to have some $40bn of assets, a net debt of $14bn, plans to spend at least $3bn a year on R&D, and will amortise some $19bn in goodwill over 30-40 years. Although the life sciences business will begin life with a high debt equity ratio of more than 80%, its chief financial officer Patrick Langlois said a key target is to get it down to 40% within four years of start-up. He predicted an annual "free" cashflow of $1bn-$1.5bn, which he says will help improve the debt/equity position.

The new business also claims 1997 proforma performance of $3.8bn in earnings before interest, tax depreciation and amortisation (EBITDA), and forecasts an improved position for this year. Langlois said that as Aventis will be a French-registered company "it will benefit from tax efficient structures".

Rausch said "tax optimisation is an issue" and that Aventis is looking to benefit from a rate of about 35% in France. However, he saw no particular threats or advantages to being subject to French law instead of German. 

By: Patrick Reynolds
+44 208 652 3214

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