Sanofi-Aventis and Merck agreed to reforge ties in animal health, combining the French drugmaker's Merial unit and Merck's Intervet/Schering Plough to take the top spot in the $19 billion market.

The equally split joint-venture complements Merial's predominance in pets with Merck/ISP's stronger position in livestock and their geographical presence in a sector which is estimated to grow an annual 5 percent on average until 2014.

Sanofi will pay Merck $250 million on top of an extra $750 million already agreed on last year when Sanofi bought Merck's stake in their Merial business for $4 billion. At the time both drugmakers said they would explore a tie-up.

The joint-venture will surpass Pfizer Animal Health, if it wins anti-trust clearance from regulators in the United States, Europe and other countries.

At a conference call Sanofi and Merck chief executives declined to indicate what possible anti-trust challenges they might face and as a result, did not say what cost benefits the combination could yield, or give growth targets.

Shares in Sanofi, which is diversifying its business to shield it from patent challenges and the arrival of cheaper generics, rose to as high as 56.29 euros and by 0958 GMT were up 0.8 percent at 56.20 euros, beating the DJ health index .SXDP.

The payments are perfectly in line with expectations, Helvea analyst Karl-Heinz Koch said, estimating the joint-venture to generate cost benefits of $300 to $400 million, representing between 5 and 7 percent of total proforma sales.

The joint-venture in its current shape would have an estimated 29 percent market share compared with Pfizer's 20 percent, combined sales of $5.3 billion and staff of about 13,600. The headquarters location has yet to be decided.

Overall its a good deal for Sanofi, it adds stability to profits as patents expire, Koch said.

RESILIENT AND RESISTENT

Sanofi's Chris Viehbacher said growth would be supported by rising demand for food from a growing world population and an expanding middle class in emerging markets becoming pet owners and requiring more protein in their diets. Also more elderly people are taking pets as the world's population ages.

(The pet and production animal businesses) have been pretty resistent and resilient as we came through the economic crisis in 2009 and as you look forward they are business that allow us to take advantage of these growth trends, Viehbacher said.

Merial is more focused on the Americas, ISP is more present in Europe and emerging markets.

The deal could close as early as at the end of 2010 or at the beginning of 2011, depending on anti-trust regulators.

We couldn't tell you how much, or what things might need to be divested, Viehbacher said, only naming poultry vaccines as an example where both companies have an overlap.

Rivals that could be interested in snapping up vet assets that may need to be spun off include Eli Lilly's (LLY.N) Elanco, King Pharmaceuticals' (KG.N) Alpharma and Phibro (PAHC.L), as well as Europe's Virbac (VIRB.PA) and the animal health units of Bayer (BAYGn.DE) and Novartis (NOVN.VX).

Roughly two-thirds of Merial sales comes from companion animals, a marketing-sensitive segment, as its performance is linked to the economic cycle. Merial's top product is flea and tick treatment Frontline for cats and dogs.

ISP is mainly present in livestock -- chiefly in cattle for which it makes respiratory vaccine Bovipast -- taking up about three quarters of 2008 sales, a presentation last year showed.

Buying the other half of Merial so far has been Sanofi's biggest deal since Viehbacher became chief executive end 2008.

Sanofi had to wait for Merck to complete its $41 billion takeover of drugmaker Schering-Plough before it could conduct due diligence to see if it would want to join veterinary forces as part of its strategy to diversify its business.

Merck Chairman and CEO Richard Clark reiterated in the conference call that Merck last year had shed its Merial stake to speed up the approval process for the Schering-Plough takeover and that the sale as such had not been a requirement.

Sanofi has said it expects to strike a similar number of takeovers and partnerships this year as last year's 33 deals, to offset sales lost to generic competition due to patent expiries or challenges to several of its blockbusters.

(Additional reporting by Ransdell Pierson in New York; Editing by Rupert Winchester and Louise Heavens)