Novartis AG will start merger talks with Franco-German Aventis SA to help it fight off a hostile bid from Sanofi-Synthelabo SA , the Swiss pharmaceuticals group said on Thursday.
A combination of Novartis and Aventis would create the world's number-two drugmaker behind Pfizer Inc of the United States. It would also leave Sanofi out in the cold and potentially vulnerable to takeover bids itself.
Novartis said it was not sure it could cement a deal but its decision to start formal negotiations still surprised investors, many of whom had expected it to walk away after strong signals from French officials in support of Sanofi's 46.5 billion-euro ($54.92 billion) stock-and-cash bid.
Shares in Novartis fell 2.7 percent by 4:05 a.m. EDT on concerns it might get sucked into a costly bid battle, while Aventis climbed 3.5 percent and Sanofi added 2.9 percent.
"I'm slightly surprised by the timing because it is far from clear to us that Novartis's second condition of French government neutrality has actually been achieved," said Marc Booty, industry analyst at Commerzbank in London. "But if Novartis do win, it shows that French assets can be taken over by a non-French third party, which puts Sanofi straight back in play," he added.
Aventis invited Novartis into talks earlier this month, the first condition for talks, but the Swiss firm has said it would start negotiations only if the French government was neutral.
Chirac and Schroeder
French government officials have signaled they would favor an all-French deal in what they see as a strategically important sector.
But Novartis Chief Financial Officer Raymund Breu told journalists French President Jacques Chirac and German Chancellor Gerhard Schroeder had indicated on February 9 that they would remain neutral.
"We have done a feasibility study and we know how compelling the project is. We are confident that we have addressed all the concerns (of the French government). Now time will tell," he added.
Breu said Novartis also took comfort from comments by European Commission officials that Brussels would take the lead in reviewing a merger on this scale.
An Aventis spokesman said the Strasbourg-based company welcomed the move. The French government declined to comment.
Industry analysts believe Novartis could prevail in a head-to-head fight with Sanofi, given its financial strength.
That muscle was underlined on Thursday when the Swiss group reported a 22 percent jump in first-quarter net profit to $1.29 billion, boosted by one-off factors and 19 percent sales growth at its flagship drugs business.
Separately, Sanofi posted a 12 percent rise in first-quarter sales to 2.193 billion euros, thanks to robust growth of its four top-selling drugs.
Drug cocktail
Novartis's appetite for Aventis has been whetted by the chance to build a leading position in cancer, diabetes and heart disease -- three of the world's top killers.
Some analysts have also predicted Novartis could achieve greater cost savings than Sanofi to pay for a deal.
Attractive products from the Aventis stable include anti-thrombotic Lovenox and hypertension drug Delix, cancer treatment Taxotere and diabetes drug Lantus.
