Bayer Said to Offer Assets, Cash in Race for Merck’s Unit

Bayer AG moved a step closer to winning Merck & Co.’s consumer business after lead rival Reckitt Benckiser Group Plc walked away from the deal because the asset became too expensive.

“We are a highly disciplined acquirer with strict return metrics, which we will not break,” Reckitt Benckiser Chief Executive Officer Rakesh Kapoor said in an e-mailed statement.

Bayer offered to pay cash and swap assets from animal-health, pharmaceuticals, and oncology businesses or create a joint-venture with Merck that includes these, two people familiar with the matter said, asking not to be identified discussing private information. A heated contest between the two bidders means Merck may fetch more than $14 billion in a sale of the the unit, well over early estimates of its value, the people said earlier today.

An asset swap would follow a similar deal announced by Novartis AG and GlaxoSmithKline Plc this month, in which Novartis will acquire Glaxo’s cancer business while it sells the British company most of its vaccines division. In January, people with knowledge of the matter said Novartis held talks to swap its animal-health and human-vaccines businesses for Merck’s consumer business.

“A good pharma management team should use the assets they don’t want to generate good investment opportunities,” Marshall Gordon, an investor with ClearBridge Investments LLC, wrote in an e-mail. “The pharma business generates more than enough cash for reinvestment. The key challenge is finding assets to buy.”

Claritin, Coppertone

Merck has identified its veterinary unit as one that isn’t big enough on its own, meaning it needs either to sell it or bulk it up. The company had $15.6 billion in cash at the end of 2013, data compiled by Bloomberg show.

When Merck first put the maker of Claritin allergy medicine and Coppertone sunblock up for sale, people familiar with the matter expected it to fetch about $10 billion. Bayer and Reckitt Benckiser made offers that are richer than suitors including Sanofi, Novartis, and Boehringer Ingelheim GmbH, the people said.

Merck shares fell 0.9 percent at $58.17 as of 1:23 p.m. in New York today, after rising to their highest since January 2008 yesterday. Bayer gained 0.6 percent, while Reckitt Benckiser fell 1.4 percent.

Bayer had faced stiff competition for the asset from Reckitt Benckiser, the people said. In 2012, the British company made a surprise counterbid for Schiff Nutrition International Inc. for $1.4 billion, topping an agreed offer from Bayer. The German company declined to raise its offer for Schiff, saying the price would have been too high.

Iconic Aspirin

Since taking over in 2011, Kapoor has grown the company’s consumer-health division through acquisitions to offset slowing growth at its household-cleaning unit.

“It was brave to step away -- it’s the right call,” said Eamonn Ferry, an analyst at Exane BNP Paribas, of Reckitt’s decision. “At $14 billion, they could not get value creation in any reasonable period. Where they go from here in terms of strategic deals, that’s the downside. Their options are much more limited now.”

Bayer’s over-the-counter portfolio is anchored by the iconic pain pill Aspirin. The Leverkusen, Germany-based company had 3.9 billion euros ($5.4 billion) in sales of non-prescription medicines last year, accounting for about 9.7 percent of the drug and chemical conglomerate’s revenue.

It is the third-biggest company in over-the-counter drugs by sales, behind Johnson & Johnson and Glaxo, according to a ranking compiled by Glaxo for the announcement of its deal with Novartis.

Representatives for Merck and Bayer declined to comment on the sale.