Hoechst, Rhone-Poulenc Merger on Track; Support Scant (Update1)
Bloomberg News
March 16, 1999, 7:31 a.m. ET
Hoechst, Rhone-Poulenc Merger on Track; Support Scant (Update1)
(Adds that meeting started, release expected.)
Paris, March 16 (Bloomberg) -- Hoechst AG and Rhone-Poulenc
SA, Germany's and France's biggest drugmakers, are likely to go
ahead with a merger that has the enthusiastic support of
practically nobody.
Analysts denounce the merger, which would create the world's
No. 2 drugmaker, because both companies already suffer from low
margins, few major drugs and too many managers. Shareholders are
hardly more enthusiastic. ''While we are not for it, we aren't
against it,'' was the best Hoechst's biggest investor, Kuwait
Petroleum Corp., could say about the merger.
Management at Frankfurt-based Hoechst and Paris-based Rhone-
Poulenc never had a lot of options. Neither is big enough to
compete alone with the heavyweights as the $244 billion drug
industry consolidates. And other suitors that would preserve the
two companies' identities were nowhere to be seen.
''I don't expect miracles from those two, but neither
partner can afford to be left at the altar,'' said Jacques-
Antoine Bretteil, who manages $200 million at International
Capital Gestion and owns Rhone-Poulenc shares.
A Bloomberg News poll of 10 analysts and investors found all
believe Hoechst's supervisory board, which meets today, will
agree on a blueprint for the merger that can be submitted to
shareholders at the May 4 annual meeting.
The board includes company executives, labor unions and a
representative from Kuwait Petroleum, and began its meeting at 10
a.m. Hoechst spokesman Carsten Tilger said the company will
release a statement after the end of the discussion.
State-owned Kuwait Petroleum, which owns 24.5 percent of
Hoechst, is the key player in tomorrow's meeting. Opposition from
its representative could derail the merger.
Hoechst shares rose 0.05 euro to 42.35 in early trading on
the Frankfurt stock exchange. Rhone Poulenc shares rose 0.18 euro
to 41.18 on the Paris exchange.
Least of Evils
''There will be a lot of discussion, maybe some concessions,
but my feeling is that this will go through,'' said Jeremy Davis,
an analyst at HSBC Securities in London. ''It's the least of all
evils.''
The merged company, to be called Aventis SA, will rank just
behind Merck & Co. among the world's drugmakers and occupy the
No. 1 spot among makers of crop protection products.
Aventis won't have any products to match the sales of major
rivals' leading drugs. Hoechst's top-seller, a heart drug called
Cardizem, had $880 million in sales in 1997, while Rhone-
Poulenc's Lovenox, another heart drug, generated revenue of about
$500 million. Merck and Pfizer Inc., maker of the impotence pill
Viagra, both have drugs with sales of more than $2 billion a
year.
If Aventis had been in business last year, it would have had
operating profit of $3.8 billion on sales of $20 billion, giving
it an operating margin of 19 percent. Glaxo Wellcome Plc of the
U.K., which will be displaced from the No. 2 spot by Aventis, had
an average margin of 34 percent in the last five years.
What little enthusiasm existed on Dec. 1 when the Aventis
joint venture was first announced was based on optimism that the
new company would be leaner and better managed than Hoechst and
Rhone-Poulenc are today. But the chances that Aventis will be
able to cut the 11,000 jobs consultants said are necessary are
slim because French and German unions will object.
No German Job Cuts
Rainer Kumlehn, who represents the German chemical workers
union in the state of Hessen, said he will support the merger
because he has management's assurance that no German jobs will be
lost at least through 2002.
''My major concern and that of other labor members was job
security,'' Kumlehn said. ''I have no major objection now.''
In France, the objections of labor unions aren't as
important as they are in Germany because labor is not as widely
represented on corporate boards. Rhone-Poulenc's board is
expected to swiftly approve the merger when it meets March 23.
Even so, French unions haven't had the same assurances as their
German counterparts, and are also worried about the new company's
growth prospects.
''I'm wary of mergers in general because they bring job
cuts,'' said Alain Magnanelli, who represents French union CGT on
Rhone-Poulenc's board and said he will oppose the merger. ''But
I'm particularly wary of this one because I don't think it makes
strategic sense.''
Neither do holders of Rhone-Poulenc stock, which has fallen
3 percent since the merger announcement. By comparison, the
Bloomberg index which tracks 24 European pharmaceutical stocks
has climbed 8 percent, and Hoechst's stock has surged 21 percent.
Cash for Shareholders
Even the rise in Hoechst's shares, however, doesn't reflect
investors' hopes for the merger, analysts said. Rather, ''the
reason for Hoechst's rise is that they are openly talking of
returning to shareholders the cash proceeds that they would get
from the sale of their chemicals businesses,'' said Davis at
HSBC.
Investors also said if Hoechst shareholders get the majority
share in Aventis -- as suggested by recent comments from both
companies, which point to a 60/40 split -- investors may want to
buy Hoechst shares rather than Rhone-Poulenc's.
The full merger will take place in three years, when each
has shed its chemical units. First, the companies plan to pool
their life-science units in a 50/50 joint venture.
''I happen to have a couple Rhone-Poulenc shares that I'll
hold on to for now,'' said Michel Dumoulin, who helps manage $5.4
billion at Fimagest in Paris. ''I won't buy more, though, and if
I didn't have any I certainly wouldn't be running out to get
some.''
The companies' merger plan hinges on their ability to shed
their chemicals businesses. Hoechst is expected to dominate
Aventis because its life-science units are worth more and its
chemicals units are bigger than Rhone-Poulenc's: their 1997 sales
surpassed those of Rhone-Poulenc's equivalent business by 4
billion euros ($4.4 billion).
Sales at Rhone-Poulenc's drugs and agrochemicals divisions
totaled 52.8 billion French francs ($8.8 billion) in 1997.
Comparable sales at Hoechst were 18.03 billion marks ($10.1
billion).
Selling Celanese
As for their chemicals units, Hoechst is looking to sell
assets that had 9.7 billion euros in 1997 sales. That includes
Celanese, a company it is creating to unite its main chemicals
units and plans to spin off, and its 45 percent stake in Clariant
AG, the world's No. 1 specialty-chemicals company. Rhone-Poulenc
owns 67 percent of Rhodia, the world's fourth-biggest specialty-
chemicals maker, which had 1997 sales of 5.7 billion euros.
Shareholders in both companies will have to muddle through,
though few will have as much at stake as Kuwait Petroleum, whose
Hoechst stake is worth about 6.4 billion euros. There's only so
much a merger among also-rans can accomplish, analysts said.
''It preserves the status quo under the guise of a forward
move,'' said Pierre-Henri Leroy, president of Proxinvest, which
advises institutional investors on mergers. ''Neither company is
the pace-setter for new drugs. There's no punch in the merger.''
--Marthe Fourcade in the Paris newsroom (331) 5365 5065 with
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