Takeover proposal

Scope considers Merck’s proposed takeover of Versum Materials Inc., a US-based manufacturer of electronic materials for semiconductor producers, to have neutral to slightly positive implications for the business risk profile, despite being an expensive transaction with a consideration of EUR 5.3bn (based on enterprise value).The electronic materials industries are growing strongly and the acquisition appears to be a good fit for Merck. The acquisition would also make Merck’s Performance Materials division significantly less dependent on liquid crystals, which has been under significant pricing pressure recently.

Scope also expects credit metrics to deteriorate significantly after the transaction, although this would be mitigated by the more than EUR 2.5bn of proceeds estimated from the sale of Merck’s Consumer Healthcare business at the end of 2018. According to Scope’s initial calculations, leverage is likely to increase to about 3x in 2019 (as expressed by Scope-adjusted debt to EBITDA on a pro-forma basis), which is higher than the agency’s expectation of about 2x at the end of 2018. Scope expects key credit metrics to move in line with the ratio guideline (Scope-adjusted debt/EBITDA of 2.5x; funds from operations/Scope-adjusted debt of at least 30%) by mid- to end-2021.

In Scope’s view, the transaction is likely to occur given the cash nature of Merck’s offer combined with the company’s solid investment grade. The announcement follows the end of the January 2019 proposal for a non-cash merger of equals between Versum and Entegris Inc., already approved by the boards of both companies. If accepted, the transaction is likely to be executed in the second half of 2019 and, according to Merck, will be financed with a mixture of cash and debt.

Rating implications

Scope continues to view Merck management’s financial policy as strongly supportive of the ratings. While the decision to pursue another sizeable acquisition after Sigma Aldrich (2016) is a slightly earlier than Scope’s expectations, and its recognition was accelerated by Entegris’ move on Versum, Scope believes Merck is likely to generate significant cash inflows in the next years to facilitate the envisaged deleveraging, supported by the strong performance expected for the Healthcare and Life Sciences divisions in the near future. Management’s commitment to its investment grade rating is incorporated into Scope’s rating assessment.

This publication does not constitute a credit rating action. For the official credit rating details click here. Scope has assigned Merck KGaA an issuer rating of A-. The short-term rating is S-1. The Outlook is Stable.