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Merck KGaA Ups Schering AG Stake, Stands in Bayer's Way

[75% of SHR’s shares have to vote for approval of any takeover, and this is what makes Merck KGaA’s increased stake a potential deal-breaker for Bayer. Stay tuned.]

http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn:newsml:reuters.com:20060609:MTFH11434_2...

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Fri Jun 9, 2006 8:37 AM ET
By Sitaraman Shankar

FRANKFURT, June 9 (Reuters) - German drugs and chemicals group Merck KGaA <MRCG.DE> has raised its holding in rival Schering AG <SCHG.DE> to just over 10 percent, threatening a planned takeover of Schering by Bayer AG <BAYG.DE>.

Schering said in a filing with the U.S. Securities and Exchange Commission overnight that Merck owned 10.086 percent of the company.

Merck, whose Schering stake is worth around 1.65 billion euros ($2.1 billion) at current prices, declined to comment.

Bayer, a rival German drugs and chemicals group, is trying to acquire Schering for 16.5 billion euros, having trumped an earlier proposed offer by Merck. Bayer said in a statement it had starting buying Schering stock and that the offer for Schering would continue as planned.

"In order to strengthen our position, we began purchasing Schering shares on the market on Friday," Bayer Chief Executive Werner Wenning said. "We hope that Merck's intervention will not prejudice Schering's development."

A Bayer-Schering deal would create a healthcare company with sales of around 15 billion euros, enabling the German companies to better compete with global drugmakers.

Bayer has offered Schering shareholders 86 euros a share for their stock. It has set a threshold of 75 percent for the takeover to be successful and as of Thursday afternoon had garnered a stake of more than 40 percent.

The offer runs out next Wednesday.

Analysts and traders said the move was a twist to the takeover drama. "Through the build-up of the stake, the takeover is somewhat in doubt," said a trader in Frankfurt. "A squeeze-out is now ruled out, and we have a stalemate."

Analysts at Merck Finck brokerage said in a note that Merck's move could delay Bayer's takeover plans but that they saw the deal eventually going through.

"We think that Bayer will take over Schering at the end of the day, and we do not expect that the offer price will be increased," it said, but added that there was a risk that Bayer would not reach a 75 percent holding by Wednesday.

Merck Finck said that German regulators could waive a one-year ban on another bid by Bayer if Schering's management agreed to another offer.

Bayer shares were down 2.9 percent at 32.61 euros at 1214 GMT, the only losers on Germany's DAX bluechip index <.GDAXI>.

Merck shares were up 1.8 percent at 73.79 euros and Schering up 0.3 percent at 86.08 euros, just above Bayer's offer price.

PRISONER'S DILEMMA

Analysts are unclear whether Merck, which never actually got to the stage of approaching Schering shareholders with its 77-euro-a-share bid, can make another offer soon, or can partner with another bidder.

It pulled out of the bidding for Schering once Bayer came in with a higher offer. The collapse of a Bayer-Schering deal could also hurt Merck, because it would result in a fall in Schering shares, diminishing the value of its holding.

"A shortfall to the 75 percent could turn out to be a deal breaker, with possible negative consequences for Schering's share price and thus Merck's holding in Schering," said Martin Possienke, an analyst at Equinet.

DZ Bank raised its rating on Schering to "buy" from "hold", saying it recommended that shareholders not accept Bayer's offer amid the current uncertainty.

"Should Merck really make another attempt to take over Schering, this would be just as difficult," it said, noting the size of Bayer's stake in Schering.

"One possible option could be a negotiated solution between Bayer and Merck over the individual business divisions."

"Merck will certainly buy more Schering shares," said another trader, adding the probability of Bayer's bid falling through had risen -- possibly opening the door to Merck again.

Bayer said Merck was now paying a price for Schering shares which just a few weeks ago it had described as unjustified, and the reason for withdrawing its offer.

It described Merck's move as a blocking tactic that left investors uncertain about its strategy.
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