Cardinal Health's proposed $2.8 billion acquisition of Bergen Brunswig Corp., announced last week, would create the nation's largest drug distribution company, consolidating more than 30% of the $64 billion market.
With $22 billion in annual revenues, the combination of the nation's second- and third-largest drug distributors promises blockbuster efficiencies, company executives said.
But analysts predict federal antitrust regulators will scrutinize the combination. Customers also are eyeing the deal.
"To truly benefit the marketplace, they'll have to be as aggressive as ever," said Lee Majewski, acting director of material services at Northwestern Medical Corp., Chicago, which uses Bergen Brunswig for both drug and medical-surgical supply deliveries.
Majewski said he expects continuing competition to compel the new giant to pass at least some savings on to customers. But "the litmus test (of the deal's value) will be the integration," he said.
As announced, Dublin, Ohio-based Cardinal would acquire Orange, Calif.-based Bergen Brunswig in a $2.4 billion stock swap. Cardinal also would assume $386 million in Bergen Brunswig debt.
For the fiscal year ended June 30, Cardinal reported net income of $211 million on $11 billion in revenues. Bergen Brunswig earned $83 million on $11.3 billion in revenues.
Subject to shareholder and regulatory approval, the deal is expected to close late this year or in early 1998. The combined company would be called Cardinal Bergen Health and would be based in Dublin.
But first, the Federal Trade Commission is expected to take a long, hard look at the proposed transaction. At issue is whether promised efficiencies would yield customer savings outweighing the negative effects of increased concentration in the distribution industry.
Cardinal and Bergen Brunswig executives trumpeted the deal's synergies in a conference call with investors and the press last week.
Robert D. Walter, Cardinal's chairman and chief executive officer, said the combined companies would reap $100 million in annual savings by the third year of the merger. Analysts called the estimate conservative.
"We expect to pass the major benefits of this transaction on," Walter said.
He termed the merger "highly pro-competitive" and said it would create the largest efficiencies he's "ever seen for a transaction of this size."
Walter would become CEO of the new company. Bergen Brunswig Chairman Robert E. Martini would serve in the same capacity at Cardinal Bergen Health.
Closing redundant distribution centers lies at the heart of the consolidation strategy. Cardinal and Bergen Brunswig operate 57 drug distribution centers nationwide. That number would be reduced to fewer than 30, Walter said.
Two-thirds of the company's business would be handled by just 14 of the remaining centers, Walter estimated.
Such "mega-centers" lend themselves to automation. Between mechanization and scale, the mega-centers could shave around 50 basis points, or 0.5%, from the 2.8% administrative costs typical of smaller drug distribution centers, estimated Larry Marsh, an analyst with Salomon Bros., New York. "We're talking about lots of nickels in a pennies' business," he said.
If antitrust regulators are convinced the merger will benefit customers, the new company's marketshare shouldn't prompt a vote to block the deal.
"Thirty percent (marketshare) is clearly a level (regulators) will be concerned about, but not such a great level that on its own it would block the deal," said John Steren, an antitrust attorney with Ober, Kaler, Grimes & Shriver, Washington.
Previous blockbuster deals in drug distribution have foundered on antitrust objections.
Nine years ago, drug distribution leader McKesson Corp., San Francisco, abandoned its acquisition of a unit of Amerisource, Valley Forge, Pa., when the FTC voted to oppose the deal in federal court.
At the time the FTC said the transaction "would substantially reduce competition in wholesale prescription drug distribution and the related services provided by wholesalers."
Since then, however, McKesson has been successful in acquiring bankrupt distributor FoxMeyer Drug Co. For about $24 million in cash and $575 million in assumed debt, McKesson picked up $3.4 billion in annualized sales in the deal. It was approved by a U.S. bankruptcy court judge last November. Antitrust regulators did not intervene.
"Efficiencies today matter a great deal more (to the FTC) than they did nine years ago," antitrust attorney Steren said.
Despite the considerable regulatory hurdles, Wall Street observers expressed confidence that the deal would be consummated.
"They know what they're getting into, and they've done their homework," David Risinger, an analyst at New York-based Morgan Stanley Dean Witter Discover, said of the companies. "My bet is that they'll get it through the FTC."