Germany's Merck KGaA has completed the $1.65 billion (€1.32bn) sale of its laboratory distribution business, VWR International, to US investment firm Clayton, Dubilier & Rice.
The move is part of Merck's strategy of hiving off lower-margin activities to concentrate on three core areas - pharmaceuticals, chemicals and liquid crystals - with the added advantage of leaving it nearly free of debt.
VWR had sales last year of $2.8 billion, or roughly a third of Merck's turnover, but has low margins. Merck dropped plans to float the company last year and said in December it was likely to sell the company in the first quarter of 2004. Analysts welcomed the move, particularly the benefit in reducing the firm's net debt which had stood at €2.9 billion ahead of the announcement, making it one of the most highly-geared companies in the sector.
VWR has been directly affected by the difficult environment in the drug industry, which has seen significant R&D spending decreases across the biotech and pharmaceutical marketplace. And as a US-based business reporting results in Europe it has been hard hit by the effects of the weak dollar. Selling off this low-margin business could improve Merck's margins from around 10 per cent at present to 15-16 per cent, according to analysts.
Meanwhile, for CD&R , VWR fits neatly into its business model; taking over established businesses that are considered non-core by the parent company and injecting new operating structures in the aim of improving their performance.
In the US alone VWR has around a 15 per cent share of the life science research market, just behind its rival Fisher Scientific (18 per cent), with which it dominates this market. The firm's Merck Eurolab division is the leading player in Europe.
Richard Schnall, a CD&R partner involved in the transaction, said that the company has a history of successfully investing in distribution businesses, "and will utilise that prior experience as we work closely with the management team to accelerate VWR International's growth."
One element of the strategy will be to raise the company's market share in Europe and other non-US markets, said CD&R. At present, two thirds of VWR's sales come from North America, with one third from Europe.
As part of the agreement, VWR will continue to distribute Merck's laboratory products. For that purpose, effective 1 April, Merck will combine its Analytics & Reagents and Life Science Products divisions into a new Life Science & Analytics division. This division will enter into a long-term distribution agreement with VWR.
VWR offers more than 750,000 products, from more than 5,000 manufacturers, to over 250,000 customers throughout North America and Europe.