(Updates with closing share price in fifth paragraph.)
Dec. 5 (Bloomberg) -- Merck KGaA agreed to buy AZ Electronic Materials SA for about 1.6 billion pounds ($2.6 billion) in cash to boost its offering of specialty chemicals to the electronics industry.
AZ stockholders will receive 403.5 pence for each share, the Darmstadt, Germany-based drug and chemical company said in a statement today. The price is 53 percent above the closing level yesterday in London trading.
The purchase of Luxembourg-based AZ would strengthen the industrial-materials unit that’s driven Merck’s sales growth in recent years as its pharmaceutical business struggles to develop new medicines. Chief Executive Officer Karl-Ludwig Kley will add anti-reflective coatings used in hard-disc drives, specialty chemicals for the graphic-arts industry and shrink coatings used in the manufacturing of memory devices alongside the liquid crystals for flat-screen displays that Merck sells.
“Liquid crystals has always been the pearl, so it makes sense to me,” said Fabian Wenner, an analyst with Kepler Cheuvreux in Zurich. Wenner expects Merck to make more acquisitions, he said.
Merck rose 4.9 percent to close at 130.50 euros in Frankfurt, giving the company a market value of 28.4 billion euros ($38.8 billion). The stock has returned 33 percent this year, compared with a 25 percent return for the Bloomberg Europe Pharmaceutical Index.
AZ surged 50 percent to close at 395 pence in London. The company sold shares in a 2010 initial public offering at 240 pence. The acquisition is contingent on approval by antitrust authorities and a minimum acceptance level of 95 percent of the shares, Merck said.
Merck and AZ are a “unique fit” and it will be difficult for others to make competing bids, Merck Chief Financial Officer Matthias Zachert told journalists today.
“Very few companies have such similarities,” Zachert said. “This represents a very fair offer.” He said he is “quite confident” of reaching the 95 percent threshold. Merck expects the deal to close in the first half of 2014.
Like Merck, the company supplies makers of flat-panel displays, producing high-purity solvents and polymers. It also is a supplier to the market for organic light-emitting diode technology, or OLED, which is used to make flatter, lighter panel displays and lighting systems.
“We have known AZ for many years now,” Kley told journalists today. “If you visit our customers you will see AZ employees on site.”
Merck is offering a multiple of 10.7 times Ebitda, which compares with an average multiple of 9.49 times Ebitda for specialty chemicals deals over the last five years, according to data compiled by Bloomberg.
AZ generated revenue of $794 million last year. That means pharmaceuticals will account for more than half of Merck’s sales even after the purchase. The German company had 6.5 billion euros in revenue last year from drugs such as the Erbitux cancer treatment, and 4.3 billion euros from chemicals and lab equipment.
Merck has been expanding outside of drugs after acquiring biotechnology-equipment supplier Millipore in 2010 for about $6 billion. Kley said previously that the company wouldn’t make any large acquisitions before 2014 unless they added value.
“You will not see us manufacturing refrigerators because it’s something we know nothing about,” he said today.
The deal would come with integration costs of about 50 million euros between 2014 and 2016 and generate savings worth about half of that, according to the statement. While the cost synergies between the two companies are low, there are cross- selling opportunities, according to Wenner.
BofA Merrill Lynch provided financial advice to Merck, and Allen & Overy is the company’s legal adviser. AZ used Rothschild as lead financial adviser, and Goldman Sachs International and UBS Ltd. as joint corporate brokers and joint financial advisers. Clifford Chance LLP provided legal advice to AZ.
Like Wenner, analysts at Barclays said they expect Merck to make more acquisitions. The company still has about 8 billion euros left in cash for acquisitions, which “clearly leaves a reasonable amount to be deployed,” Barclays analysts led by Michael Leuchten said in a note today.
AZ first traded on the London Stock Exchange in October 2010 after co-owners Carlyle Group and Vestar Capital Partners each sold $137 million of stock and management another $26 million. Carlyle bought the company from Swiss specialty chemicals maker Clariant in 2004.
AZ’s customers extend beyond the electronics industry. The company makes a transparent coating designed to repel graffiti, making surfaces too slippery for paint, markers and sprays to stick and easier to wipe clean in the event that they do.
--With assistance from Marthe Fourcade in Paris. Editors: Marthe Fourcade, Kristen Hallam, Tom Lavell.