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McKesson may seek joint venture with Celesio after bid fails


By Rachel Landen
Posted: January 15, 2014 - 3:00 pm ET
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McKesson Corp. says it is considering other ways to work with German drug distributor Celesio, such as a joint venture, after narrowly failing to win the necessary shareholder support to acquire the company.

John Hammergren, McKesson's CEO also said he was open to resurrecting the $8.4 billion deal. “If we can put a deal back together at the same economics, then we might be open to it,” Hammergren said Monday at the JPMorgan Healthcare Conference in San Francisco.

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But he told reporters and analysts that McKesson won't “sit around for two years trying to get a deal done … If we're unsuccessful in getting that transaction back on the table, there are alternatives for us.”

In a note published Tuesday, Ricky Goldwasser and other Morgan Stanley analysts suggested three potential moves that McKesson could make next. One such scenario involved a sourcing joint venture with Celesio that could generate approximately $175 million in earnings before interest and taxes, or an additional 50 cents of earnings per share.

Herman Saftlas, an analyst at Standard & Poor's, called a joint venture “definitely in the realm of possibility,” but pointed out that it would sacrifice certain synergies and the total control that McKesson had been targeting. “They'd still make money and it would be accretive, but not to the level of an acquisition,” Saftlas said.

“My gut feeling is they put a lot of effort into this deal,” he said. “It's hard to believe they would walk away from the whole thing.”

But that is exactly what Deutsche Bank analyst George Hill expects.

“We believe that McKesson is less interested in joint ventures or partnerships where McKesson does not control the purchasing,” Hill wrote in a note. He suggested that the company's unsuccessful bid marked the end of its attempted takeover of Celesio, though he suggested M&A transactions with other companies might be considered.

Others agreed McKesson may consider buying competing European wholesalers. “Celesio is not the only game in town,” wrote Greg Bolan, analyst at Sterne, Agee & Leach.

But a more likely scenario could be that McKesson will spend the $8 billion to resume its share repurchase program, which had been suspended.

“We just can't afford to let our capital sit,” Hammergren said. “Clearly, the easiest and fastest to execute are share repurchases, and we've used those in the past in our portfolio deployment strategy.”

The bid failed because McKesson was unable to convince enough Celesio investors to sell their shares of the company. Under German takeover law, McKesson needed investors to tender 75% of the company's outstanding shares and convertible bonds.

Yet despite winning the approval of its largest shareholders—investment firms Franz Haniel & Cie. and Elliott Management Corp.—McKesson came up short. Investors holding 72.33% of Celesio's shares supported the sale, even though McKesson agreed last week to raise the value of its bid last week in order to get Elliott on board.

“The best I can speculate is that people either forgot the tender date or they somehow believed there is more value on the other side of this,” Hammergren said.

Follow Rachel Landen on Twitter: @MHrlanden


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