Transaction

Last week, Merck’s management announced the disposal of its consumer health sub-division (part of its healthcare division) to Procter & Gamble. The disposal proceeds are slightly above Scope’s expectations and reflect relatively high multiples on a sales and EBITDA basis. The sub-division generated EUR 911m in revenues in 2017 and Scope assumes an underlying EBITDA margin of about 20%. Main products include vitamin treatments Neurobion (EUR 309m in sales in 2017) and Vigantol as well as nasal spray Nasivin.
The transaction is expected to close towards the end of 2018.
Management has confirmed that the bulk of the net proceeds will be used for deleveraging – as expected by Scope in line with management’s proven conservative financial policy in the context of its family ownership.

Rating implications

Scope believes that ratings implications are positive, confirming the base case underlying its current ratings. Credit metrics have a high likelihood of improving significantly compared to 2017. Divestiture proceeds will thus be available in a timely fashion to more than compensate for the credit downside in connection with: i) the anticipated weakness in Merck’s liquid crystals 2018 cash generation; ii) a likely rise in marketing and selling expenses (for newly approved drugs Mavenclad and Bavencio); and iii) higher expected group capital expenditure. Scope believes that its ratio guidelines for Merck’s A- rating (funds from operations/Scope-adjusted debt >30%, Scope-adjusted debt/EBITDA <2.5) are thus very likely to be met in 2018.

This publication does not constitute a credit rating action. For the official credit rating action release click here. On 25 July 2016, Scope assigned Merck KGaA an issuer rating of A-. Senior unsecured debt issued by the company is rated A-.The short-term rating is S-1. The Outlooks are Stable.