What happened? Merck KGaA has announced that it has agreed to sell its Surface Solutions business to Hong Kong listed, pearlescent pigments producer, Global New Material International (GNMI, not rated) for EUR665m. BNPP Exane View: . An inevitable solution for Surface: Speculation over an eventual sale of Surface Solutions, Merck''s smallest and likely lowest margin business unit, has long existed and hence today''s announcement will likely be viewed as an inevitable conclusion. Given Surface Solutions makes up 2% of Merck group sales (FY23A: EUR411m), its divestment, which is expected to close in 2025 does not have a material impact on Merck''s group financials. The proposed divestment of Surface focusses Merck''s Electronics division on the more attractive end-markets covered by its Semiconductor Solutions and Display Solutions businesses. . 1.6x EV/sales, estimate 9-11x EV/EBITDA in-line with precedent transactions: A purchase price of EUR665m implies an EV/sales multiple of c.1.6x. While Merck does not disclose profitability below the divisional level we note prior commentary that Surface Solutions margins are notably lower than the c.30% guidance for the Electronics division and we believe a high-teens level might be more appropriate which would support an EV/EBITDA of c.9x. This would be broadly in-line with the c.9x BASF sold its pigments business to DIC for in 2019 and the c.11x Clariant divested its pigments business for in 2021. . Proceeds to boost MandA firepower: Merck notes that it will use the net proceeds from the divestment to further strengthen its strategic core businesses. Prior to deal close, we believe Merck could have over EUR14bn available for MandA by end-24 (at 3.5x net debt/EBITDA pre) with our preference for larger amounts of capital to be allocated to Life Science and with an acceleration in in-licensing preferred for Healthcare where we believe pressure to look at commercial of lower-risk late-stage assets has increased...