* Agreed deal at 403.5 pence per share
* Widens offering of chemicals for flat-panel displays
* AZ's board recommends bid
* AZ shares up 51 percent
By Ludwig Burger and Paul Sandle
FRANKFURT/LONDON, Dec 5 (Reuters) - Merck, theworld's largest maker of liquid crystals used in TVs, tablet andsmartphone screens, has agreed to buy Britain's AZ ElectronicMaterials for $2.6 billion to expand its range ofspecialist chemicals for hi-tech gadgets.
Germany's family controlled Merck, which also makes cancerdrugs and laboratory equipment, will pay 403.5 pence per sharein cash for the supplier of chemicals used in Apple's iPad, a 41 percent premium to AZ's three-month average shareprice.
While many of Merck's peers in the pharmaceuticals industryare selling assets to focus on core businesses, Merck's dealunderscores its position as a diversified group, with the familybehind it seeking to spread its investment risk.
"Our philosophy has always been to never put all eggs in onebasket," finance chief Matthias Zachert told reporters onThursday.
The electronics industry uses specialty chemicals to producechips, displays and other components. Many of the products arehigh-margin, but demand is closely tied to production cycles inmanufacturing centres like Taiwan.
Analysts said AZ's optronics business, which suppliesproducts to make flat panels, complemented Merck's displaybusiness. They share customers such as Samsung, Sony, Panasonic and Innolux Corp.
Zachert said the deal would also give Merck new customers,such as semiconductor maker SK Hynix Inc.
Optronics made up 32 percents of AZ's $363.7 million revenuein the six months to end-June. Supplies of chemicals to thechip-making industry accounted for the rest.
Shares in the British group, which joined the stock marketin 2010 at 240 pence, were up 51 percent to 398 pence at 1127GMT. Shares in Merck were up 3.3 percent.
BOTTOM OF CYCLE
Liberum Capital analysts said the price looked fair, with an2014 enterprise value to core earnings multiple of 11.1 times inline with the 9-12 times range typical for previous specialtychemicals deals.
"While a counter bid cannot be ruled out the offer priceseems fair and the significant premium may deter others frombidding," they said.
Shares in AZ reached a high of 411.6 pence in March 2013before a profit warning the following month, on weak demand fromchipmakers, wiped a quarter of the value off its share price.
Analysts at Espirito Santo said Merck was buying a high-quality company at the bottom of the cycle, noting AZ was wellpositioned for an upturn in the production of the wafers used tomake chips.
While the price meant the possibility of a counter bid waslow, they said, other specialty materials companies such as AirProducts, Air Liquide and Linde might be interested.
Buying AZ, which was originally part of German chemicalcompany Hoechst AG, would add 5 percent to Merck's sales and 7percent to core earnings based on 2012 numbers, DZ Bank analystPeter Spengler said.
AZ's board of directors are recommending shareholders acceptthe offer. The directors have committed themselves to tendertheir own shares, representing approximately 0.7 percent of thetotal.
Merck will fund the deal, plus about 240 million euros ofdebt, from existing cash reserves. It is conditional on thebacking of 95 percent of AZ's shareholders.
BoA Merrill Lynch advised Merck, while Rothschild, GoldmanSachs and UBS advised AZ.
- Investment & Company Information