Hoechst Confirms Merger Talks With Rhone-Poulenc

Confirming weeks of speculation, German drug and chemical maker Hoechst said Wednesday that it is discussing a merger with Rhone-Poulenc of France, a union that would create the world’s largest life sciences company.

An announcement on the outcome is expected as early as next week, but Hoechst cautioned that “no guarantee can be made as to the outcome of the current discussions.”

The combined stock market value of the two companies would be about $46.78 billion, including their remaining chemical holdings.

Hoechst and Rhone have both sought to move away from their traditional industrial chemicals activities in recent years in favor of the more lucrative life sciences, a term used to describe pharmaceuticals and farm chemicals businesses.

Rumors surrounding the talks have been circulating since October, and sources close to the negotiations told Reuters that they were likely to conclude by the beginning of December.

Company spokesmen would not give any further information, but industry sources in France said Rhone-Poulenc’s contribution to the new company would include all its activities barring the Rhodia specialty chemicals unit in which it holds a 70% stake.

American depositary receipts of Hoechst fell $1.56 to close at $44.38 in New York Stock Exchange trading. Rhone stock, which does not have American depositary receipts, was down 1.2% on Paris’ CAC index.

A merged Hoechst-Rhone would create the world’s second-largest drug maker with sales of about $13 billion in the $240-billion industry. That would place it behind only industry leader Merck & Co. Inc. of Whitehouse Station, N.J.

The company would also control about one-fifth of the global farm chemicals market between Hoechst’s Agrevo joint venture and Rhone’s Rhodia subsidiary, making it the sector leader with sales of $4.55 billion.

While a merger might help the pair cut costs and would propel the duo from the second tier of drug makers into the first in terms of sales, analysts say a marriage would be fraught with difficulties.

Analysts point to the companies’ high debt burden--both have net liabilities of some $8.8 billion--the dearth of blockbuster drugs in either group’s pharmaceutical pipeline, and their modest presence in the United States.

But the biggest difficulty might come in integrating the individual cultures of the two companies. Similar problems scuppered two high-profile mergers recently, one between American Home Products Corp. and Monsanto Co. and another between SmithKline Beecham and Glaxo Wellcome.

Analysts say Hoechst, the world’s ninth-largest drug maker, is still trying to digest its acquisitions of Marion Merrell Dow and Roussel Uclaf, which it folded into its own pharmaceutical operations to form Hoechst Marion Roussel over the last couple of years.

There is also the question of who would head the new company, though analysts say Hoechst’s chairman, Juergen Dormann, appears likely to come out the winner because of the greater size of the German company. Operating margins at the two, which have also lagged others in the industry, such as Novartis of Switzerland and Merck, are cited as another challenge for a merged company.

In terms of market capitalization, the merged company would rank just fifth in Europe, behind Novartis, Glaxo Wellcome, SmithKline Beecham and Roche Holding.

Despite the merger’s drawbacks, some analysts said they supported the strategy because it would improve both sides’ overall positions in drugs and agrochemicals.

“These two groups have a goal to grow in size. Will they do that quicker if they join? The answer is yes,” said Marck Becker, an analyst at J.P. Morgan in London.