McKesson Corp.'s definitive agreement to purchase PSS World Medical represents what company executives believe is an opportunity for McKesson to quickly expand in a profitable and growing niche: distributing medical products to doctors and other non-acute-care providers. San Francisco-based McKesson and Jacksonville, Fla.-based PSS World announced Oct. 24 that boards for the two companies had approved a deal for McKesson to pay $2.1 billion, including the assumption of debt for all the outstanding shares of publicly traded PSS World. The deal calls for McKesson to pay shareholders $29 a share, or about $1.5 billion in cash.
Economies of scale
Deal will let McKesson expand distribution to docs
McKesson executives anticipate the purchase of PSS World and its $2.1 billion in annual revenue will yield significant economies of scale as it combines PSS World with its existing non-acute-care medical distribution business, which produced revenue of $3.1 billion in the year ended March 31. Meanwhile, demand for medical goods from the targeted providers also is expected to increase, according to McKesson executives speaking last week at an earnings teleconference.
“The value in synergy in this transaction will occur over time. By the fourth year, we expect to realize annual pretax synergies in excess of $100 million,” John Hammergren, chairman, president and CEO of McKesson, said on the call.
Matthew Coffina, a senior equity analyst with Morningstar, said it's not unrealistic for McKesson to expect the combined businesses to operate more efficiently. “Distribution is a highly scalable business,” Coffina said. Even though McKesson is paying a high price relative to its earnings—the price/earnings ratio on the deal is about 26—the synergies should more than double earnings over time, he said. In its fiscal year ended March 30, PSS World reported net income of $74.3 million.
McKesson, which decided to exit the medical distribution business for acute-care hospitals in 2006, also anticipates PSS World's customers to gain from the changing healthcare landscape. “This transaction underscores McKesson's deep commitment to its physician and extended-care customers, industry participants that will play an increasingly important role as the implementation of healthcare reform continues and demographic shifts increase demands,” Hammergren said.
Stanton McComb, president of McKesson Medical-Surgical, would become president of the new combined business, and Gary Corless, president and CEO of PSS World Medical, would become chief operating officer.
A closing of the deal would likely mean the end of Baptist Health President and CEO A. Hugh Greene's stint on the PSS World board; the deal would also mean a payout of nearly $88,000 for Greene. He joined the board this year and owns roughly 3,000 shares of the company. He earned $5,500 in director's fees in the quarter ended March 31, according to PSS World's proxy statement.
McKesson has entered deals to buy at least four other businesses this year, including an Oct. 1 announcement that the company agreed to purchase Med3000, a Pittsburgh-based healthcare management and technology services company, for undisclosed terms. McKesson this year also reached separate settlements with federal and state governments for a total of about $341 million, resolving allegations that it overbilled Medicaid for brand-name drugs. McKesson denied wrongdoing in the matters.
Send us a letter
Have an opinion about this story? Click here to submit a Letter to the Editor, and we may publish it in print.