Merck, Sanofi, and Schering's Love Triangle

The reverse merger to bring Merck (NYSE:MRK) and Schering-Plough (NYSE:SGP) together while attempting to avoid triggering a change in control provision in Schering and Johnson & Johnson's (NYSE:JNJ) partnership was complex enough to warrant a full-page diagram to explain it in the documents filed with the Securities and Exchange Commission.

The deal to clear up competition issues with Merck and sanofi-aventis' (NYSE:SNY) animal health joint venture, Merial, may require an entire PowerPoint presentation.

It starts out simply enough. In order to resolve the issue that saw Merck ending up with two competing animal health divisions -- its own Merial and also Intervet, which it'll inherit once it acquires Schering -- Merck is selling its half of Merial to sanofi, Merial's other owner, for $4 billion in cash.

But then things get complex pretty quickly. After Merial is sold to sanofi and Merck acquires Schering in the fourth quarter, sanofi has an option to get Merck back as a partner by combining Merial with Intervet. The valuation of Intervet is yet to be determined, but will be more than Merial, so sanofi will pay the new Merck some cash to reestablish the 50-50 joint venture.

And then if Merck decides it doesn't want sanofi as a partner anymore it can pay either $400 million or $600 million -- based on some undisclosed factor -- to terminate sanofi's option before the Merck-Schering merger is complete.

Still with me? Anyone else wondering if Las Vegas has opened an over/under on how long the Federal Trade Commission will take to sort this out?

Here's the take-home message: sanofi is mostly in the driver's seat over what its animal health division will look like. Any chance that Bayer or Eli Lilly (NYSE:LLY) had in grabbing Merial or Intervet to expand their own animal health divisions seems to be gone. But there's always the potential that they could pick up a few animal health products that Pfizer (NYSE:PFE) and Wyeth (NYSE:WYE) might need to divest to satisfy antitrust regulators for that merger.

Isn't M&A fun? Lots of moving parts here, but the Fool will help you keep track of them. Stay tuned.

Here's some numbers that are a little less complex:

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