McKesson $8.3 bln deal for drugs trader Celesio to create market leader

Reuters

By Ludwig Burger

Oct 24 (Reuters) - McKesson agreed to buy Germanpeer Celesio on Thursday for $8.3 billion, includingdebt, forging a global market leader in drugs distribution toboost its purchasing power with pharma majors.

San Francisco-based McKesson, the largest U.S. drugswholesale group, struck a deal to purchase the 50.01 percentstake in Celesio owned by the diversified holding company FranzHaniel & Cie and is offering to buy up the remainingshares for 23 euros ($31.7) apiece, it said on Thursday.

McKesson and its closest U.S. rivals, AmerisourceBergen and Cardinal Health, have all been looking togrow beyond their domestic market, where they command a combined95 percent share.

U.S. President Barack Obama's healthcare reform is alsoputting pressure on costs across the sector.

"Celesio has some very strong brands across Europe includingLloyds pharmacy and this deal gives McKesson some muscle to flexacross Europe," B. Riley & Co analyst Gene Mannheimer said.

Mannheimer said though the price may look rich, there are"very clear synergies and cost savings that McKesson cancapture."

In a high-volume industry, where operating profit margins of2 percent and less are common, the slightest improvements inprocurement and costs make a difference.

McKesson expects the deal to result in annual savings ofbetween $275 million and $325 million by the fourth year.

Separately, McKesson also reported a quarterly profit thattopped analysts' estimates.

As part of the largest German healthcare deal sincedrugmaker Bayer bought rival Schering in 2006,McKesson will gain about 22 billion euros ($30.3 billion) inannual revenues from Celesio, creating a more than $150 billionglobal drugs wholesale and pharmacies group.

That would far eclipse another transatlantic tie-up in drugstrading, the purchase of a 45 percent stake in European pharmacychain Alliance Boots by U.S. peer Walgreen Co last year.

They have close to $110 billion in annual revenues but arelooking to bulk up further as they secured the right to buy upto 23 percent of AmerisourceBergen in March.

HEADACHE

Seller Haniel, a 257-year-old family-owned conglomerate, hasbeen shedding assets to pay down its debt and offset a massivewritedown on its holding in German retailer Metro MEOG.DE lastyear. This year, the more than 600-member Haniel family had toforgo a dividend for the first time since the end of World WarTwo.

Celesio, owner of Britain's Lloyds pharmacy chain, has beena headache for Haniel.

It was embroiled in price war that has all but erasedprofits from the crowded German drugs wholesale market.Healthcare cuts across Europe, its main market, added to woes.

"After a particularly challenging 5-6 years, we congratulateHaniel for realizing a good deal for both itself and minorityshareholders," Berenberg analyst Scott Brado wrote in a note toinvestors.

Celesio Chief Executive Marion Helmes has conceded that analliance or tie-up with a U.S. partner could help win steeperdiscounts, mainly for the generic drugs it buys but also fornon-prescription medication and skincare products.

McKesson will also make a public tender offer for theoutstanding convertible bonds of Celesio, offering 53,117.78euros for each of Celesio's outstanding convertible bonds due in2014 DEA1AN5K= and 120,798.32 euros apiece for those due in 2018DEA1GPH5=.

The 23 euro per share bid represents a premium of about 43percent over the stock price since speculation began in Junethat majority owner Haniel might sell its stake.

The total transaction, including the assumption of Celesio'soutstanding debt, values the target at about $8.3 billion (6.1billion euros), McKesson added. Celesio said its management andsupervisory boards welcomed the offer.

Shares in Celesio traded 4.9 percent higher at 0812 GMT at22.79. They had closed up 6.1 percent at 21.725 euros onWednesday, after Reuters cited people familiar with the talks assaying a bid of near 23 euros per share was imminent. McKesson'sstock rose 0.7 percent to close at $143.05 on Wednesday.

McKesson plans to fund the deal from cash reserves andbridge financing, while seeking to retain its credit rating, itsaid. Standard & Poor's rates the group's long-term prospects"A-".

It expects the deal to add between $1.00 and $1.20 to itsadjusted earnings per share in the first 12 months followingcompletion, provided it gets 100 percent of Celesio. Its offeris conditional upon it obtaining at least 75 percent.

McKesson said it expected its offers for Celesio's sharesand bonds to start during the quarter through December, andconclude it by March 31, but not before Jan. 17.

The offer values Celesio including its debt at about 11times expected earnings before interest, taxes, depreciation andamortization (EBITDA) for this year, above the 9.8 multiple itsU.S. suitor is trading at.

That is in line with the multiple that Walgreen Co paid forthe stake in Alliance Boots last year.

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