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Sanofi's assault on Aventis galvanises capital markets

Sanofi-Synthélabo, the French pharmaceuticals company, lit up the bond, equity and loan markets this week by launching a Eu47.8bn hostile bid for its competitor, Aventis.

Investors and bankers in all three markets are relying on a resurgence of mergers and acquisitions in 2004 to fill out their pipelines of business. As if on cue, the world's chief executives and finance directors have come up with the goods.

Besides the battle for Aventis, Vodafone, NTT DoCoMo and Cingular Wireless are stalking AT&T Wireless in an auction with a starting price of $30bn.

UK property company Chelsfield is going through a £1.9bn management buy-out and German utility EWE is taking over gas distributor VNG.

The Sanofi-Synthélabo bid for Aventis has excited bankers and divided analysts.

If successful, it would create the world's third largest pharmaceutical company by sales, behind GlaxoSmithKline and Pfizer.

But Aventis this week rejected the offer, which has an implied value of Eu60.43 a share, saying the deal was risky and the price too low.

"This deal is not acceptable," Aventis spokesperson Tony Roddam told EuroWeek this (Friday) morning. "We have been quite happy as a standalone company. All companies have a duty to their shareholders to review all options, but this deal undervalues us. It does not recognize our potential."

Aventis's chief executive, Igor Landau, said in a radio interview yesterday (Thursday) that an offer 10%-15% higher would still be too small. He said anything less than 40%-50% above the current offer would not be of interest.

The poker game heated up today (Friday) when it was reported that Novartis was preparing to enter the fray, apparently as a white knight. Other names that have been mooted include Merck, the US pharmaceutical company.

"Everyone who is anyone in pharmaceuticals has been rumoured to be preparing a bid," said one analyst.

If Sanofi's bid goes ahead, it will be funded with 81% newly-issued equity and 19% cash, resulting in debt financing needs of just over Eu9bn.

Sanofi-Synthélabo has mandated BNP Paribas and Merrill Lynch to arrange a Eu12bn loan package in three Eu4bn tranches with maturities of one, three and five years.

With access to further equity and cash reserves, Sanofi would be unlikely to have difficulty in increasing the size of the facility.

Moody's put Aventis's A1 rating under review for possible downgrade while Standard & Poor's placed Aventis' A+ rating on CreditWatch positive.

S&P believes the proposed takeover would be positive from a business risk perspective, outweighing the weakening in the company's financial profile.

Moody's thinks the opposite is true, citing the cash amount of the transaction and noting that the integration risk could weigh on Aventis's ratings.

Sanofi is not rated but says it will obtain a rating once the details of the merger are finalised.

Rik Fennema, a credit analyst at Dresdner Kleinwort Wasserstein in London, thought Moody's response was correct.

"The financial profile of the company if it merges with Sanofi does not justify a rating in the double-A range," he said. "In our opinion, it will take some time for the combined entity to improve its financial profile since there will be significant up-front merger costs, while the benefits of the integration will be realised over time."

Sanofi has said the takeover would result in cost savings of Eu1.6bn. Fennema thinks it highly likely that the transaction will go ahead, though he would not be surprised if Sanofi has to increase its bid.

"Aventis is very resistant to Sanofi's offer, as it views the offer as an inadequate valuation of the company," said Joseph d'Virgilio, credit analyst at SG in London. "However, I suspect the transaction will go ahead, although the terms are likely to change.

"The government is heavily in support of the takeover because it would mean the creation of a French champion in a stronger global position ? and in France, history has shown that the government's support, or lack of it, generally tends to have significant influence on the success, or failure, of a merger."

There is speculation that Sanofi has acted now to avoid being taken over itself, as L'Oreal and Total, which each own around a 20% stake in Sanofi, will from December 2004 be able to sell their shares. The offer is fully supported by L'Oreal and Total.

Aventis' largest shareholder, Kuwait Petroleum, says it supports the company's management.

"Sanofi has been protected by its shareholder structure, but once shareholders L'Oreal and Total Capital are able to reduce their stakes in December, the company could become vulnerable to a takeover," said a banker. "In our view, this is one of the prime motivations for the timing of the takeover bid for Aventis."

Aventis's defenders also point to a lawsuit concerning Sanofi's patent for the anti-coagulant Plavix. If that goes badly it could put a large dent in Sanofi's value.

According to the 2003 interim report, Sanofi had ?developed sales' ? the measurement the company uses ? of Eu4.9bn in the first half of last year. Eu1.3bn of that was Plavix.

Sanofi's bid, if successful, could lead to a bond take-out of part of the loan. Corporate bond bankers are desperate for new sources of business.

Italian utility Enel is the only certain issuer left in the pipeline, having announced plans to launch a Eu1.5bn bond by the end of June. There has been just Eu10.3bn of issuance this month, compared with January 2003's level of Eu25bn.

"The euro is very strong at the moment, making it more attractive for European companies to acquire US entities," said Suki Mann, head of credit strategy at SG in London. "This is perhaps one of the reasons why there is a lot of speculation on the prospect of Vodafone acquiring AT&T Wireless ? a transaction we deem unlikely."  

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