Bayer Makes $19.5B Bid for Schering

German pharmaceutical and chemical company Bayer AG said Thursday it would make a $19.5 billion white-knight offer for Schering AG, bidding against a hostile takeover effort from Merck KgA.

Bayer said that Schering management had already given preliminary agreement to the offer.

The Leverkusen-based Bayer said in a statement that it would offer 86 euros ($103) per share, topping a Merck (MRK) offer of 77 euros ($92.4) a share already rejected by Schering management.

Berlin-based Schering, which is not affiliated with New Jersey-based Schering-Plough, is opposing the 14.9 billion euros ($17.9 billion) takeover offer from Merck, saying that it doesn't accurately reflect its value.

Bayer's statement said it would finance the acquisition out of 3 billion euros ($3.6 billion) in existing liquidity and a line of credit from Credit Suisse and Citibank. It said it would later refinance the line of credit through equity, debt and hybrid capital instruments.

"Bayer's acquisition of Schering AG would create a health care company of international standing," the Bayer statement said. "It would be consistent with Bayers strategic focus on profitable pharmaceutical specialties, and would increase these products' share of pharmaceuticals sales from currently 25 percent to around 70 percent."

"The combined pharmaceuticals business would have a balanced portfolio of sound basic businesses and business units such as oncology, cardiology/hematology and gynecology that show above-average growth rates."

The takeover would be conducted through a subsidiary called Dritte BV GmbH.

"The Board of Management of Schering AG has declared its intention, subject to a further review of the offer documents, to approve the planned takeover offer by Dritte BV GmbH and recommend its acceptance to Schering AG stockholders," the Bayer statement said.

The statement said Bayer would merge Schering AG and its existing pharmaceuticals business to form an independent division of the Bayer HealthCare subgroup. The new company, to be named "Bayer-Schering Pharmaceuticals," would be headquartered in Berlin.

Bayer said the combined pharmaceuticals business would have higher profit margins than its existing drugs business.

"Bayer believes the acquisition would further enhance the profitability of its health care business, which would have a combined sales volume of about 15 billion euros based on 2005 figures," the statement said. "It is therefore planned to increase the EBITDA margin of this business from currently 19 percent to 25 percent by 2009. It is also intended to raise the long-term EBITDA margin target for the Bayer Group as a whole."

EBITDA stands for earnings before interest, taxes, depreciation and amortization, and gives an incomplete picture of a company's performance because it excludes those items. But many companies and analysts use it as a yardstick of performance.

Schering AG shares traded in the U.S. rose $6.90, or 6.9 percent, to close at $107.20 on the New York Stock Exchange. Bayer's shares gained 58 cents, or 1.4 percent, to end at $41.69. In Germany earlier, Merck KgA shares closed down 2.9 percent at 80.49 euros.