Moody's may downgrade Merck

Moody's Investors Service said it placed the Baa1 long-term and Prime-2 short-term issuer ratings of Merck KGaA and the Baa1 long-term bond ratings of Merck Finanz AG on review for possible downgrade following the company's agreement to acquire a majority stake in Serono SA and its expected bid on the remaining shares.

The review reflects Moody's expectation that, while such an acquisition would improve Merck's position in relation to several factors that are critical to its analysis of pharmaceutical companies such as scale and diversification, the proposed transaction would result in a significant deterioration of its capital structure and cash flow to debt ratios.

Moody's said its review will focus on an assessment of the expected improvements to the business profile of the combined group; the pace at which deleveraging through cash flow generation over the next few years will reduce acquisition debt; the execution risk, in particular the capacity to retain skilled employees; and the liquidity and financing structure of the acquisition, which is assumed to include a €2 billion to €2.5 billion equity component.

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