Mckesson Buying Rival For $1.7 Bn Plus

McKesson Corp Tuesday announced plans to acquire AmeriSource Health Corp., a rival distributor of pharmaceuticals and medical products, for $1.7 billion in stock, plus debt.

The merger would keep McKesson on top of the $65 billion US wholesale drug market, a post threatened by last month's news of a

$2.8 billion merger of Cardinal Health Inc and Bergen Brunswig Corp, analysts said.

The AmeriSource transaction, the second major purchase by McKesson in a year, would create a company with more than $26 billion in annual sales and a combined retail network of more than 9,000 independent pharmacies.

While McKesson and AmeriSource shares rallied on prospects of the deal's financial and strategic upside, antitrust worries spread to the Cardinal-Bergen deal.

 

"It is a quasi-blocking strategy (of the Cardinal deal by McKesson) in some ways. The odds on Cardinal-Bergen have come down a little bit. It shines the spotlight on what is going on in the industry and increases the stakes for what the (Federal Trade Commission) is looking at," Salomon Bros analyst Lawrence Marsh said.

"This is a savvy move by McKesson, clearly a reaction to the Cardinal-Bergen announcement. (McKesson) realised that if the (Cardinal-Bergen) transaction is approved by the FTC, it would have resulted in lower odds of it being able to acquire a company of any size because of heightened industry concentration issues," Marsh said.

Under the agreement, AmeriSource shareholders will receive 0.71 shares of McKesson common stock for each AmeriSource share.

Based on Monday's closing price of $99.81 for McKesson stock, the deal values AmeriSource at $70.87 a share, well above its closing price of $53.69 Monday.

McKesson will issue approximately 17.4 million new shares of common stock in the merger and assume $532.3 mn in Amer-iSource long-termdebt. AmeriSources shares jumped $6.56 to close at $60.25 Tuesday while McKesson stock climbed $3.94 to $103.75.David Risinger, Morgan Stanley analyst, said, the McKesson-AmeriSource deal "is a very powerful combination. (Reuter)

They are talking about merging the No. 1 and No. 4 distribution companies resulting in earnings accretion and cost savings for customers."

The Cardinal-Bergen deal "would have vaulted the company to No. 1. McKesson with AmeriSource will maintain its No. 1 market share position," he said.

Assuming both mergers close, the $65 billion market would be dominated by McKesson with 34 percent of the market and Cardinal with 31 percent.

The combined company will operate under the McKesson Corp name and will be headquartered in San Francisco.

AmeriSource, based in Malvern, Pa., is the third largest vendor to the managed care market and the fourth largest national distributor of pharmaceuticals and related health care products. In August, the company signed an agreement with Pathmark Stores Inc. to be its exclusive pharmacy supplier.

McKesson, based in San Francisco, is the leading health care supply management company in North America. Last November, McKesson acquired FoxMeyer Drug and has been in the process of integrating its operations with FoxMeyer.

McKesson officials said they expect further consolidation as a result of the merger with AmeriSource.

"Our recent experience with the acquisition and rapid integration of FoxMeyer demonstrates that we can achieve significant economies of scale," McKesson President Mark Pulido said.

"We are ahead of schedule with the integration of the $3.4 billion FoxMeyer business, and our team is ready to apply the same methodology to the $8 billion AmeriSource business," he said.

Pulido said the merger with AmeriSource is expected to add to earnings by about $1 per share.

Over the next two years, McKesson said it plans to cut the number of pharmaceutical distribution centers operated by both firms almost in half to 33 centers, part of a plan to generate more than $120 million in annual savings.

After completion of the merger, R David Yost, AmeriSource president, will become president of the AmeriSource Services Group and a McKesson vice president, reporting to Pulido.

"The AmeriSource strategy has been to build shareholder value through geographic expansion while maintaining the industry's lowest-cost operating model," Yost said.

"This merger advances that strategy," he said.