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Roche spins off $4B division
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December 6, 1999: 10:07 a.m. ET
Swiss drug giant to shed flavors unit; mega merger may lie ahead
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LONDON (CNNfn) - Swiss drug giant Roche announced plans Monday to spin off its flavors and fragrances division in what may be a prelude to more big mergers in the industry.
Roche will give its investors one share in the new company, to be called Givaudan, for each Roche share held. Givaudan could be worth up to $4 billion, and assuming shareholders approve the spin-off, trading in the new shares will begin at the end of May.
News of the deal raised hopes that Roche, the maker of the obesity treatment Xenical, is closer to attempting a much-anticipated merger with another major pharmaceuticals company.
"This is an expected event on the course to a mega-merger," said analyst Ian Broadhurst of Enskilda Securities, who pointed out that even at $4 billion, Givaudan would be worth less than 5 percent of Roche's total value.
Expectations are high that more consolidation is in the pipeline among major global pharmaceutical firms. Warner-Lambert (WLA) is the subject of a tussle between Pfizer (PFE) and American Home Products (AHP) in the United States. Last week the news that SmithKline Beecham (SB-) chief executive Jan Leschly is to retire early breathed new life into hopes of a deal with Glaxo Wellcome (GLXO). The two companies discussed a merger in February 1998, but Leschly and Glaxo boss Sir Richard Sykes failed to agree who would run the company.
Givaudan generated 1998 revenue of more than 2 billion Swiss francs ($1.3 billion) and operating profits of 263 million francs. Roche says Givaudan is the leading maker of flavors and fragrances, with a 17 percent market share.
The spin-off is designed to allow Roche to concentrate on its core healthcare activities.
Roche Chief Executive Franz Humer said Givaudan should have a market value of around $4 billion, and denied the spin-off indicates a merger with another pharmaceutical company is imminent.
Broadhurst said the $4 billion valuation looks on the high side, although the business is performing well. Also on the auction block could be Roche's vitamin unit, although legal wrangling following its recent admission of price fixing will probably delay any deal.
The handout of shares in Givaudan will be structured as a special dividend to reduce shareholders’ tax liability. Humer said selling the unit to another company might have led to a major tax bill for Roche.
Roche non-voting shares fell 225 francs, or 1.1 percent, to 19,075 in Zurich. 
-- from staff and wire reports
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