Biotech Values

[DewDiligence]

Merger talk from France:

[isolution: Do you have the inside scoop on this story?]

http://biz.yahoo.com/rc/031215/health_aventis_sanofi_2.html

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UPDATE - Aventis, Sanofi shares gain on mounting merger talk

PARIS/LONDON, Dec 15 (Reuters) - Aventis SA (Paris:AVEP.PA - News) and Sanofi-Synthelabo (Paris:SASY.PA - News) shares both gained more than two percent on Monday as speculation of a merger between France's top two drugmakers mounted.

Industry analysts have long tipped the tie-up that would create a $100 billion French champion in a consolidating global pharmaceutical industry.

The idea has gained ground since last month's decision by cosmetics giant L'Oreal (Paris:OREP.PA - News) and oil major Total (Paris:TOTF.PA - News) not to renew their shareholder pact over Sanofi when it expires in December 2004.

With both drugmakers facing threats to patents on top products in 2004, a pragmatic pooling of drug pipelines and cutting of costs has clear attractions.

Both firms boast market capitalisations of around $50 billion and the enlarged group would be capable of fighting its corner in a industry dominated by giants like Pfizer Inc (NYSE:PFE - News) of the United States and Britain's GlaxoSmithKline Plc (London:GSK.L - News).

Based on 2002 sales, a merged Aventis-Sanofi would rank number two in the world behind Pfizer but ahead of GSK.

Aventis shares added 2.5 percent to 51.05 euros by 1425 GMT and Sanofi was up 2.2 percent at 57.50, outperforming Europe's pharmaceuticals index (Zurich:^SXDP - News), up 0.7 percent.

"Their outperformance relative to the (drug) market is a short-term phenomenon. As long as merger speculation persists Aventis and Sanofi will move in tandem," a London-based analyst said.

AVENTIS IN NO RUSH

The decision by L'Oreal and Total to end their pact frees both companies, which jointly own 44 percent in Sanofi, to sell their stakes in a move that could put the firm into play.

The idea that Aventis might step into the frame was clearly hinted at last January when Sanofi Chief Executive Jean-Francois Dehecq said Sanofi might do a deal with Aventis "one day".

Martyn Postle, of UK-based consultancy Cambridge Healthcare and Biotech, said Sanofi's limited reach and lack of direct U.S. market presence meant it needed to act.

"Sanofi-Synthelabo is sub-critical mass to compete with global giants. So they have a choice, either to become very therapy-focused or to become truly international," he said.

Strasbourg-based Aventis could fit the bill, with its strong presence in the United States and Europe's top market, Germany.

But Aventis management may be reluctant to cut a deal yet, at least until it closes a looming valuation gap. Aventis shares currently trade on 14.7 times consensus 2004 earnings against 17.3 times for Sanofi, according to Reuters data.

"I think Aventis regard a Sanofi merger as the most likely deal for them to do, if they do any deal," said one healthcare banker familiar with the companies.

"But I don't think it is likely to happen in 2004. They'd rather do it from a position of strength...and I don't see anything happening on a hostile basis."

DEAL LOGIC

The logic of combining the two companies was highlighted by a story in the French press last week, based on a 50-page report from brokerage Exane and Bionest Partners.

It concluded that a combined group would have a lower risk than either company alone, by effectively diluting patent threats to Aventis's Allegra and Lovenox and Sanofi's Plavix.

Cost synergies would also help smooth the effects of loss of patent protection.

Although labour regulations make cost cutting in Europe difficult, the report nonetheless estimated that a merged group could strip out five percent of the combined cost base.

There would relatively few areas of anti-competitive product overlap with the thrombosis business one of the few area where disposals might be required.
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