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Oct 24, 2013

McKesson's $8.3B Celesio Deal Builds Drug Warehousing Powerhouse

  • McKesson said today it will acquire Celesio in a €6.1 billion ($8.3 billion) deal that will create a global powerhouse in drug wholesaling and other healthcare services that will likely enjoy heightened purchasing power with biopharma giants at a time when the U.S. and world healthcare systems are struggling to contain costs.

    Celesio will be folded into McKesson’s distribution solutions segment, headed by Paul C. Julian, evp and group president. However, McKesson and Celesio said they expect to maintain their own brands and continue to support customers through existing channels once the acquisition is completed.

    The combined company said the deal will benefit pharmacies, manufacturers, patients, and others by delivering increased supply-chain efficiency, improved global sourcing, enhanced global distribution and logistics capabilities, broadened the selection of technology and business services, and created a distribution network stretching across three continents.

    As with rivals AmerisourceBergen and Cardinal Health, McKesson is looking beyond the United States for expansion opportunites. “The combination of McKesson and Celesio will create a leading global healthcare services platform that will advance our customers' ability to deliver better, more efficient healthcare solutions," McKesson CEO John Hammergren said in a statement.

    McKesson plans to buy the entire 50.01% Celesio stake owned by Franz Haniel, then launch voluntary tender offers for Celesio’s remaining publicly traded shares and convertible bonds, at €23 ($31.70) per share. The share price represented a 39% premium over the three-month volume-weighted average price prior to October 8, when market speculation began about a deal. McKesson also agreed as part of the deal to assume Celesio’s outstanding debt.

    Haniel, a family-owned investment company, has held a stake in Celesio since 1973—a stake it reduced late last year as part of a series of debt-reduction moves.

    McKesson said it expects to complete the tender offers in its fiscal fourth quarter of 2014, which ends March 31, 2014, and expects to complete the required steps to obtain operational control of Celesio during McKesson’s 2015 fiscal year.

    A portion of the transaction will be funded with cash, McKesson said, adding that it has put a bridge financing facility in place to fund the remainder. A permanent financing structure will be determined by the timing and the number of Celesio shares and convertible bonds in the tender offers.

    McKesson projects that by the fourth year following completion of steps to obtain operational control of Celesio, annual synergies of between $275 million and $325 million will be realized.

    Fitch Ratings placed a “Ratings Watch Negative” on McKesson’s 'A-' long-term Issuer Default Rating and other ratings, raising the possibility they will be downgraded: “The proposed Celesio deal is strategically sound, but its funding is likely to significantly increase MCK's debt load,” already higher than usual for A- rated companies following its acquisition of PSS World Medical earlier this year.

    However, Leerink Swann upgraded its rating on McKesson shares to outperform: “Overall, we believe MCK will get better pricing, MCK will be able to provide more services to its manufacturing partners, and we believe there will be significant cost synergies as well,” the firm said in a note to investors.

    "In addition to Celesio, MCK should benefit from generic launches, trends in specialty, an increase in coverage from the [Affordable Care Act, or “Obamacare”], and incremental capital deployment,” according to the note, written by Leerink Swann's David Larsen, CFA, and Chris Abbott.



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