Bellagha Sarah Fakih Ahmed Lapierre Charles Group12

Corporate Finance

Case study:

SANOFI-SYNTHELABO and AVENTIS: The Birth of a National Champion

Course Instructor: Barbara PETITT

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1.
Pros and cons of the merger :
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Pros : First, the merger between Sanofi and Aventis would lead to an increase in market share of 10% in 10 therapeutic area and would be ranked in the top 5 for 6 therapeutic areas: first in cardiovascular/thrombosis and vaccines, second in arthritis/osteoporosis, and third in allergy/respiratory, oncology and metabolism/diabetes. Actually, Aventis is present in 8 major therapeutic areas, top 3 areas being cardiovascular/Thrombosis (20,9% of sales), allergy/respiratory (13,9%), and metabolism/diabetes (11,8%). Furthermore, Sanofi is present in four major therapeutic areas which are cardiovascular/thrombosis (39,4% of sales), Central nervous system (28,8%), Internal medicine ( 17,6%), and oncology (10,8%).

Secondly, in term of R&D Sanofi-Aventis would become the worlds third largest pharmaceutical company with 39 drugs in Phase II or Phase III and five potential blockbusters; As Sanofi had notably invested $1.3 bn in R&D ( 16.4% of sales) and had 56 compounds in development, and as Aventis had invested $12.9bn (16,4% of sales) and has 54 compounds in development.

Third, Sanofi-Aventis would become the worlds third largest pharmaceutical company in terms of sales, and would be ranked first in Europe with a market share of 9% and ninth in the US with a market share of 4%.

Cons : According to Aventis management, Sanofi is offering an unattractive premium of only 3,6% whereas Aventis was expecting a premium of at least 30%. So Aventis was valued at $59.63 per share.

A merger between Sanofi and Aventis would lead to 10 000 to 12 000 layoffs.

If the generic version of Plavix (a drug generated by Sanofi) is launched, it would affect Sanofis stock price leading to a decrease of 25%, and therefore, drop the value of Aventis. In fact, to buy Aventis, Sanofi offered an exchange of 6 Aventis shares against 5 Sanofi shares plus a cash of $11.5. Aventis was valued at $56,83 per share ( $11,5 in Cash and $45,33 paid in stock), so a decrease by 25% of Sanofis stock price would drop the value of Aventiss stock from $45,33 to $34. Aventis would be therefore valued at $45,50 (11,5+34) instead of $56,83. The cash of $11,5 staying unchanged.

4.1
WACC Methods:

To calculate the Value of forecasted period, we used the common size ratios available in the case an d multiplied by the growing sales ( 7% per year in a constant basis). Capex: We based our calculation of Capex on the difference between net property plants and equipments (t+1) net property plants and equipments (t) + depreciation (t+1).

Before tax cost of debt:

We assumed that the before tax cost of debt is equivalent of the effective interest rate as a book value of debt and interest expense are available in our case: Before tax cost of debt = Interest expense / (STD + LTD)

Risk free rate:

To determine the risk free rate, we took the on Government Bills or bond. We choose to base the risk free rate on a 10years maturity because we assumed that it is the cosest period to our forecast horizon (5years).

Stock price:
We choose the stock price on December, 31st 2003 (page 21) as we based the WACC calculation for this period of time.

Continuing Value:
The continuous value (or terminal value) is a solution that represents the cash flows after the forecast period. We choose the perpetuity growth model to calculate the value of cash flows after the forecast period, i.e. after 2008. Then we calculated the PV of FCF from 2003 to 2008, and added the CV to the PV of Free Cash Flows (in 2008)

Debt Value:
The debt Value is normally associated to the market value of debt. However, the case do not supply this data, that is the reason we decided to use the book value of debt.

Valuation of the Synergies between Sanofi and Aventis:

In this part, we decided only to take into account the bonus generated by the merger, we mean the supplement value added to Aventis only, which is $16.39. Indeed, an Aventis total equity value per share of $74.59 against a value of $58.20 before the merger.

5. To bid or not to bid?

Sanofi offered to exchange 5 Sanofi shares + 69 against 6 Aventis shares. That leads to an Aventis share value of 59.63 . If the synergy effect would not be taken into account, this offer would be attractive as the equity value per share calculated previously was 58.2 . However, when we added synergy effect, Aventis equity share value reached an amount of 74.59 . Therefore, Sanofis offer is undervalued and if Avensis shareholders accept the first 4

offer they will loose the cash flow generated by the acquisition synergy effect. As a result, J.F. Dehecq have to increase his offer from 59.63 to 74.59 per share, that is to say a premium of 29.61%. Premium = (74.59 - 57.55) / 57.55 57.55 is the Aventis stock price on January, 23 rd 2004, the same value uses by Sanofis management to calculate its first offered premium ( 3.6% ).