S&P puts Merck, Schering on negative watch

Standard & Poor's said it placed Merck KGaA's BBB+/A-2 corporate credit ratings and Schering AG's A/A-1 corporate credit ratings on CreditWatch with negative implications.

The CreditWatch placement reflects Merck's planned €14.6 billion offer for Schering AG. Schering immediately declined the offer from Merck, citing that the proposed €77 per share does not adequately reflect the value of the company, but Merck intends to proceed on a hostile basis.

S&P said the CreditWatch placement reflects the likely deterioration in credit quality of the combined group if the transaction goes ahead. Merck's detailed financing plans for the acquisition have not yet been made public, but the agency said that even if the financing mix includes a significant equity increase along with potential asset disposals, the planned acquisition would most likely also entail a significant portion of debt funding, resulting in a materially higher leverage.

The agency said the combination of both companies would create a midsize pharmaceuticals player in a global context with a very high and diverse non-ethicals pharmaceuticals exposure and limited geographic and inter-divisional overlaps and that the added pharmaceuticals operations would positively affect Merck's current business profile. However, an improved business profile of a larger Merck-Schering company might not be sufficient to avoid deterioration in its combined financial profile, according to S&P.

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