ANSI_PADDING issues when creating a Merge Publication

HELP!

I am trying to create a merge publication on SQL 2008R2 instance. I have no problems creating any other publications on this instance or creating a merge publication in 2012.

SET ANSI_PADDING ON;
use [DBA_maintenance]
go


exec sp_replicationdboption @dbname = N'DBA_maintenance', @optname = N'merge publish', @value = N'true';
go
select is_published, is_merge_published from sys.databases where name = 'DBA_Maintenance';
SET ANSI_PADDING OFF;
GO

Msg 1934, Level 16, State 1, Procedure AuditObjects, Line 92
INSERT failed because the following SET options have incorrect settings: 'ANSI_PADDING'. Verify that SET options are correct for use with indexed views and/or indexes on computed columns and/or filtered indexes and/or query notifications and/or XML data type methods and/or spatial index operations.

This code was generated in SSMS and therefore should work without me having to bury down and mess with system sps.

Question is HOW can I get it to work?