Merck brands purchased by P&G P&G

P&G to Buy German Merck’s Consumer Unit for $4.2 Billion

The consumer-goods manufacturer is under pressure to spur growth, with activist shareholder Nelson Peltz and others seeking radical change.

Procter & Gamble Co. agreed to buy Merck KGaA’s consumer-health business for 3.4 billion euros (US$4.2 billion) to bolster growth, betting that vitamins and decongestants can hasten its comeback.

The deal gives the maker of Crest toothpaste a stable of products with sales growth of 6% in the past two years, double the pace of traditional consumer goods such as razors, diapers and tissues. German drugmaker Merck put the the unit up for sale last year as it pumps money into testing new medicines.

P&G is under pressure to spur growth, with activist shareholder Nelson Peltz and others seeking radical change at a time when Amazon.com Inc. and Costco Wholesale Corp. squeeze supplier costs and niche brands lure away consumers.

The deal represents “a step in the right direction for P&G,” said Deborah Aitken, an analyst with Bloomberg Intelligence.

Merck’s Seven Seas cod liver oil and Bion3 supplements had reportedly attracted interest from rival Reckitt Benckiser Group Plc as well as drugmakers Mylan NV and Perrigo Co. At P&G, health makes up 12% of sales, with only a few brands such as Vicks pastilles, Prilosec heartburn tablets and Pepto-Bismol for upset stomachs.

The deal values Merck’s business at 4.2 times annual sales -- a fair price, according to Aitken. Others in the field, such as Pfizer Inc., have sought multiples of 5 times sales for consumer-health operations, she said.

Merck shares were little changed in Frankfurt trading, falling 0.4% to 81.34 euros at 9:35 a.m.

The acquisition will improve P&G’s geographic scale, the company said in a statement Thursday. Merck’s $1 billion business provides a range of products for muscle, joint and back pain, colds and headaches, according to the statement.

“We like the steady, broad-based growth of the OTC Health Care market and are pleased to add the consumer-health portfolio,” said David Taylor, Procter & Gamble’s CEO.

Several drugmakers have been considering selling their consumer divisions. While those grow at attractive rates for consumer goods companies, they typically have far lower profit margins than the prescription pharmaceutical business. Novartis sold its interest in a consumer joint venture to partner GlaxoSmithKline Plc, gaining cash to invest in innovative drugs. Pfizer is reviewing its options after the sale of its consumer-health business fizzled in March, with potential suitors such as Reckitt bowing out.

Merck CEO Stefan Oschmann said the divestment is an “important step in our strategic focus on innovation-driven businesses.” The company is separate from U.S.-based Merck & Co.

P&G shares rose 1.3% in post-market trading on Wednesday in New York. The company is scheduled to report third-quarter earnings today.

By K. Oanh Ha and Jeff Sutherland

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