German drugmaker Merck on Thursday unveiled a surprise 16.6 billion Swiss franc (7 billion pound) deal to buy Swiss biotech firm Serono, creating a new force in European pharmaceuticals.

The cash offer would create one of Europe's biggest drug groups with a combined market value of around $32 billion (16.9 billion pounds), annual sales of almost 8 billion euros (5.4 billion pounds) and a research budget of around 1 billion euros (671 million pounds).

Merck, which earlier this year failed in its bid to buy rival Schering , said it would need to raise capital to finance the deal, which involves buying a 64.5 percent stake from Serono's founding Bertarelli family for 1,100 francs a share in cash and making a public offer for the remaining shares at the same price, also in cash.

The Bertarelli stake also gives Merck 75.5 percent of the voting rights in Serono.

The deal, which gives a 29 percent premium to the average Serono share price for the 30 days prior to the deal, comes after Serono's Chief Executive Ernesto Bertarelli had moved to seek takeover targets after abandoning attempts to find a buyer.

Keeping in mind that Bertarelli announced an acquisition strategy and that assigned Serono the role as predator planning acquisitions, today's news is a complete surprise to the market, Tilman Dumrese, senior analyst healthcare a Sal. Oppenheim, said.

It is a fair offer for the remaining shareholders, said ZKB analyst Claude Zehnder, who expects the shares to rise close to the 1,100 francs.

Serono was already up for sale in the spring. At that time one thought one could get a little more but no buyers were found then ... It was always clear that the Bertarelli family would sell its stake if an offer was made.

For the German group, which was frustrated by Bayer in its attempt to buy Schering earlier this year, the deal gives much needed additional critical mass.

Europe's mid sized drugmakers, like Merck and Serono, have found themselves at a pinch point in a global pharmaceutical industry facing tougher markets and rising research costs.

Many rely on only a handful of medicines and once these products reach the end of their life cycle there is not a large enough development pipeline to replace them.

As a result, while Merck and Serono have enjoyed good growth rates recently, analysts say their future as stand alone operations has been far less certain.

(Additional reporting by Ben Hirschler in London)