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Rating Action:

Moody's places A3 ratings of Merck KGaA on review for downgrade

23 Sep 2014

Frankfurt am Main, September 23, 2014 -- Moody's Investors Service has today placed on review for downgrade the A3 long-term issuer and senior unsecured ratings of Merck KGaA (Merck) and its rated subsidiaries. Concurrently, Moody's has affirmed the P-2 short-term issuer and (P)P-2 ratings of Merck and its rated subsidiary.

"We are reviewing Merck's ratings for downgrade because its proposed acquisition of Sigma-Aldrich Corporation will triple its debt levels to more than EUR17 billion and significantly deteriorate its credit metrics to the extent that they will no longer be commensurate with an A3 rating if the transaction completes," says Stanislas Duquesnoy, a Moody's Vice President and lead analyst for the issuer. "That said, we view the proposed acquisition as making good strategic sense as Sigma is extremely profitable and both companies' businesses are complementary."

RATINGS RATIONALE

-- REVIEW FOR DOWNGRADE OF A3 LONG-TERM RATINGS --

Today's rating action reflects Merck's recent announcement that it has made an all-cash offer to acquire the shares of Sigma-Aldrich Corporation (Sigma) for $140 per share. If the transaction completes as proposed, Merck's on balance sheet adjusted debt (with pro forma adjusted debt as per the 12-month period through June 2014) will increase from approximately EUR5.4 billion to more than EUR17.0 billion. As a result, the pro forma credit metrics of Merck will deteriorate markedly with debt/EBITDA increasing to around 4.5x from 1.7x and Cash flow from operations /debt declining to below 20% from around 43% currently.

The proposed deal values Sigma at approximately EUR12.7 billion (including net cash at Sigma of EUR0.4 billion) or close to 20x expected 2014 EBITDA.

Moody's has decided to place all of Merck's long-term ratings under review for downgrade as its pro forma credit metrics will no longer be commensurate with an A3 rating and will not be for a prolonged period. Based on Moody's current expectations and given Merck's commitment to refrain from major debt-financed acquisitions in the next couple of years and to use future cash flows generated to delever, Merck's credit metrics will be back to target levels for a Baa2 credit rating 18 to 24 months after closing and to levels commensurate with a Baa1 rating within 30 to 36 months after closing.

However, Moody's also recognizes that the proposed acquisition makes strategic sense as Sigma is a very good fit for Merck's Millipore division. The acquisition will broaden Merck Millipore's customer and product basis and will increase its market power with the combined entity becoming number two in the consolidating life science industry. The transaction also reduces Merck's dependency on its pharma division, with a modest pharmaceutical pipeline. In addition, Sigma is a very well managed, highly profitable (i.e., EBITDA margin in excess of 30% and return on invested capital (ROIC) of around 20%) and free cash flow generative (i.e., free cash flow/EBITDA of around 50%) life science company.

Based on the current offer of $140 per Sigma share Moody's would expect the potential rating downgrade, if any, to be limited to two notches.

-- AFFIRMATION OF P-2 SHORT-TERM RATING --

Today's affirmation of the P-2 short-term rating reflects Moody's view that Merck's liquidity profile will remain sound following the closing of the proposed transaction. The group's strong cash flow generation profile (pro forma free cash flow generation of around EUR2 billion per annum), access to an undrawn EUR2 billion revolving credit facility (without any Material Adverse Change clause and financial covenants) and a EUR2 billion unutilised commercial paper programme underpin this liquidity.

The affirmation of the short-term rating also reflects (1) Merck's commitment to delever swiftly after closing and (2) the group's strong track record of deleveraging post material transactions (e.g., Merck Serono in 2007 and Merck Millipore in 2010).

The review process will be mainly focused on (1) an in-depth assessment of the strategic rationale for the acquisition; (2) a review of the integration plan including the assessment and quantification of potential revenue and cost synergies; (3) a review of the short- to medium-term business prospects for both Sigma and Merck ; (3) the precise pro forma impact of the transaction on Merck's credit metrics and a review of the deleveraging path going forward; and (4) a review of the funding of the transaction and the related costs.

WHAT COULD CHANGE THE RATING UP / DOWN

In light of the announced tender offer for Sigma, positive rating pressure is currently not anticipated. That said, upward rating pressure could arise if Merck were to substantially improve its pharmaceutical pipeline while further strengthening its financial profile with, in particular, CFO/debt consistently above 55% and cash/debt above 45%.

Downward rating pressure could develop if Merck's operating performance were to weaken materially or the group were to undertake a large debt-financed acquisition, as exemplified by the Sigma transaction, resulting in its CFO/debt ratio deteriorating below 45% and remaining at that level for a prolonged period of time.

The principal methodology used in these ratings was Global Pharmaceutical Industry published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stanislas Duquesnoy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places A3 ratings of Merck KGaA on review for downgrade
No Related Data.
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