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Agrochemical deal planted
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December 2, 1999: 7:59 a.m. ET
Novartis, AstraZeneca to merge agro units, create world leader
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LONDON (CNNfn) - Swiss drug giant Novartis and Anglo-Swedish AstraZeneca announced plans Thursday to each spin off their agricultural chemical businesses, then merge them into a company with estimated annual revenue of nearly $8 billion and a market value of about $12 billion.
The deal will result in 3,000 job cuts, and is expected to reap annual pretax cost savings of $525 million by the third year of the merger.
The new company, to be called Syngenta, will be the biggest agrochemical business in the world. It will be listed on the Swiss, London, New York and Stockholm bourses.
Analyst Tony Cox at Dresdner Kleinwort Benson pointed out that though agrochemicals is still a very profitable business, earnings have gone backward in recent years, as industry conditions have gone through a cyclical slump.
Still, Cox said the worst was over for the industry, with signs of an improvement in prospects appearing.
Bourses were ambivalent about the deal. AstraZeneca stock slid more than 2 percent to 2,780 pence in London, while Novartis shares inched 0.5 percent ahead in Zurich to 2,514 francs.
The move allows Novartis and AstraZeneca to focus on their core health care businesses. But investment bank Warburg Dillon Read lowered its recommendation on AstraZeneca stock from "reduce" to "sell" Thursday, citing fears over upcoming patent expirations.
"We believe the valuation of AstraZeneca shares does not currently reflect a sufficient discount for the upcoming patent expiries for some of the company's largest products including Losec and Zestril, both in 2001 in the U.S.," Warburg analysts wrote in a note, according to Reuters.
In a statement, Novartis said, "After a thorough review of its business portfolio strategy, the board of Novartis concluded that the benefits of concentrating on the health care businesses outweigh the modest synergies between the healthcare and agrobusiness activities."
The deal is likely to spark a further wave of sector consolidation. Analysts said drug companies looking to merge among themselves would find it easier to do deals if they are unencumbered by non-core agriculture units.
"Companies are under desperate pressure to shed these operations," commented analyst Cox of Dresdner Kleinwort Benson, adding that there are a number of international agrochemical businesses on the auction block -- and only a few buyers -- so putting the companies together this way avoids having to sell at a low price.
Novartis shareholders will get 61 percent of the merged Syngenta's shares and AstraZeneca shareholders will receive 39 percent, the companies said in a statement.
The transaction is slated for closing in the second half of 2000, subject to approval by both companies' shareholders and regulators.
Novartis' agrochemical chief, Heinz Imhof, will serve as chairman of the new company, which will be based in Basle, Switzerland, site of Novartis' current headquarters.
Novartis' animal health business and AstraZeneca's 50 percent holding in seed business Advanta are not included in the transaction.
The companies said Syngenta would be the first "pure play" agrobusiness company with worldwide reach. Based on 1998 combined sales, the new company would rank No. 1 in the crop protection market, with leading positions in herbicides, fungicides, insecticides, seed treatments, and a third-ranked position in seeds. Its sheer size could cause problems with regulatory authorities however, as the company is likely to have a global market share of around 25 percent.
Crop protection will contribute $6.9 billion, or 87% of the business, and seeds approximately $1 billion, or 13% of the business.
AstraZeneca was formed earlier this year through the $35 billion merger of U.K.-based Zeneca with Sweden's Astra. The company's drug portfolio includes the ulcer drug, Prilosec, also known as Losec, the world's top-selling prescription drug. 
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AstraZeneca
Novartis
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