S&P's outlook on Aventis positive on Sanofi takeover bid

27 January 2004 14:27  [Source: ICIS news]

LONDON (CNI)--Standard & Poor’s (S&P) announced Tuesday it had placed Aventis’ “A+/A-1” ratings on CreditWatch with positive implications after the unsolicited bid yesterday by French drugs group Sanofi-Synthelabo.

 

The credit ratings agency said it believed a merger, under the terms presented in Sanofi’s hostile bid of about Euro47bn ($60bn), would improve the Franco-German life sciences group’s business risk profile but added that the merger would slightly weaken the financial position.

 

Yesterday, Moody’s placed Aventis’ long-term senior unsecured debt ratings under review for a possible downgrade, though the Prime-1 was affirmed for short-term debt.

 

S&P credit analyst Omar Saeed told CNI today that the key benefit from a merger was the foreseen boost in critical mass for research and development (R&D). He added that increased marketing muscle was also important, especially in the US.

 

In addition, Saeed said the combined group would be the third largest pharmaceuticals group in the world, have increased diversity in its product portfolio, improved operating margins and synergy benefits would be won from rationalising both geographic and therapy overlaps – such as in thrombosis, cardiology and oncology.

 

Yesterday, in launching its hostile takeover bid, Sanofi said that it expected the merged group would benefit from Euro1.6bn per year in pre-tax synergistic savings from 2006, assuming rapid completion of a merger by mid-2004.

 

Sanofi’s pitch was roundly rejected by Aventis barely hours after it was issued. Last week, Aventis said it saw no place for aggressive takeovers in the pharmaceuticals sector, and alluded to possible “other scenarios” offering greater industrial and social benefits. No further comment was given but there has been speculation that Sanofi’s precipitative move could bring rival bids for Aventis into play.

 

Competition from rival hostile bidders, or ‘white knight’ friendly suitors, would turn the spotlight even more firmly on a weakness of Sanofi – increasing generics competition. Saeed said about a third of Sanofi’s key products would become more exposed through patent protection ending in the next few years, whereas Aventis’ exposure is chiefly to anti-allergy drug Allegra’s patent-protected Euro1.6bn sales, which is about 10%-12% of group revenues.

 

Saeed added that further risks to the business case for the merger included the firms’ under representation in the vital US market while being too heavily centred in France, which he said “currently does not have favourable growth characteristics”.

 

While viewing the net effect of benefits and risks as being positive for Aventis’ business outlook, Saeed added that a merger with Sanofi on the given deal would slightly weaken the Franco-German group’s financial profile. 

 

He told CNI that the combined group would have Euro9bn in gross debt (Euro7bn net) added to its books due to borrowings needed by Sanofi as part of its mixed stock/cash bid for Aventis.

 

“Debt being added is not good for Aventis’ bondholders,” Saeed said. However, he noted that one-off gains from disposals expected to be demanded for regulatory approval of the deal could boost the merged group’s cash position.

 

On an operational basis, before accounting for disposals as well as acquisitions and any share buyback, the merged group’s free cash flow position would be “substantial”, at Euro1.7bn, Saeed added. The figure was calculated after cash, taxes, working capital, dividend and capital expenditure.

By: Patrick Reynolds
+44 208 652 3214

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