* Elanco to pay $5.3 bln in cash, about $2.3 bln in stock
* Elanco to surpass Boehringer as 2nd largest supplier
* Bayer says fetching 18.8 times adjusted core earnings
* Elanco gains strength in e-commerce, tick and flea control(Adds shares, Roundup litigation, Elanco rights issue)
By Ludwig Burger
Aug 20 (Reuters) - Elanco Animal Health agreed tobuy Bayer's veterinary drugs unit on Tuesday in acash and stock deal valued at $7.6 billion, creating the secondlargest maker of medicines for pets and livestock and expandingElanco's reach online.
The deal is the latest in the fast-growing animal healthmarket, which has recently seen Elanco floated by Eli Lilly andCo and rival U.S. drugmaker Pfizer also spinningoff its veterinary medicine business.
It also adds to the list of assets sold by Bayer, as theGerman company looks to slash debt from its $63 billion takeoverof seed maker Monsanto last year and as it braces for apotential settlement of lawsuits over an alleged cancer-causingeffect of weedkiller Roundup.
The two companies said Bayer would receive $5.3 billion incash and $2.3 billion worth of Elanco stock based on a price of$33.60 per share, the 30-day average price as of Aug. 6.
Elanco said the stock amounted to 68 million shares, or astake of about 18.2% based on Refinitiv data, but the number ofshares could rise or fall by as much as 7.5%, depending onElanco's share price performance on the closing date.
Refinitiv data on 373 million outstanding shares does notyet take into account the dilutive effect from an as-yetunspecified capital increase that Elanco plans to carry out.
The price tag for the deal implies a multiple of 18.8 timesadjusted core earnings, Bayer said, adding it would sell theequity stake over time.
Reuters reported last month that Bayer had approached Elancoto discuss a possible combination that would be number two afterindustry leader Zoetis and ahead of unlisted BoehringerIngelheim - which bought animal health assets from Sanofi- and drugmaker Merck & Co.
Market researchers expect the $44 billion animal healthsector to grow 5%-6% per year, driven by an increase inlivestock farming and, more importantly, by more people wantingto own pets and spending more money on their wellbeing.
FUNDING
Bayer is the world's largest maker of flea and tick controlproducts for cats and dogs, with Elanco praising its "toppresence on Amazon" with "industry-leading e-commerce/retailcapabilities."
"The move combines our long-standing focus on theveterinarian, while meeting pet owners’ changing expectation ofpet care and access to products," said Elanco CEO JeffreySimmons.
Elanco said it planned to fund the cash payout to Bayer witha combination of new debt and equity, with the size of theequity capital increase depending on future market developments.
Its shares were down 6.7% at $27.81 at 1430 GMT, while Bayershares were unchanged.
Bayer has recently sold its 60% stake in a chemical parkoperator as well as consumer health brands Dr. Scholl's andCoppertone, with combined proceeds of close to 2.4 billion euros($2.7 billion).
Credit rating agency Moody’s said the Elanco deal wouldimprove Bayer's ability to reduce its debt load and shoulder anexpected settlement of the Roundup cases. S&P and Fitch, inturn, flagged the risk of a credit rating downgrade for Elanco.
Equity analysts at Citi said Bayer sold near the top of theprice range the brokerage had projected. It expects Bayer to buyback 3 billion euros worth of its own shares in 2020 to offsetlower earnings per share from the divestments, with theremainder of the proceeds used to speed up debt payments.
Analysts have put the likely Roundup settlements at $5-$10billion, with many saying the share price reflects exaggeratedmarket expectations of a $20-$25 billion hit. Bayer stronglydenies a carcinogenic effect from using Roundup.
Elanco said it expected the transaction to close by themiddle of 2020.
(1 euro = $1.1073)(Additional reporting by Aakash Jagadeesh Babu, Kanishka Singhand Saumya Sibi Joseph in Bengaluru, Editing by Michelle Martinand Mark Potter)