Saturday 24 March 2018

Share watch: The McKesson merger throws up opportunities

In buying out the Stuttgart firm, McKesson became the world leader in pharmaceutical distribution
In buying out the Stuttgart firm, McKesson became the world leader in pharmaceutical distribution

John Lynch

If, like me, you get befuddled by the plot complexities of 'New Tricks' and 'Foyle's War' you would be wise to approach an understanding of the European drugs distribution sector with some caution.

One of the more recent transatlantic takeovers involves German company Celesio and American giant McKesson.

In buying out the Stuttgart firm, McKesson became the world leader in pharmaceutical distribution, picking up as it did the Lloyds chemist chain, now Ireland's largest, and recently expanding its Irish footprint by acquiring the UDG drug distribution business.

Market watchers paid special attention to the Celesio takeover. It owed its success to cute work by the long-established American activist hedge fund, Elliott International, which is led by Paul Singer.

It seems that Mr Singer and his associates had packaged €1.8bn in shares and convertible bonds in Celesio and made this holding available to McKesson to tie up the deal.

It sent the fear of God into the German business community, unused to this sort of shareholder activism. And because there is a preponderance of large family holdings in German public companies, there's fear it could make some German corporations prey to over-sexed hedge funds, of which Wall Street has its fair share.

Meanwhile, Celesio (which once owned Cahill May Roberts) has had to nestle into McKesson and prove its worth. Operating on the high street, it trades in 11 European countries with over 2,000 company-owned pharmacies and 4,300 participants in brand partnership.

It also has 103 wholesale branches supplying 65,000 pharmacies and hospitals.

The company, prior to its acquisition, had a turnover of €20bn with operating profits of €354m and at the time of the acquisition was valued at €5bn. McKesson, founded in 1833, is a leading distributor of pharmaceutical goods at retail level, a provider of medical supplies, health and beauty care and health information technology.

It is responsible for one- third of all prescriptions in the US, with 12,000 owned or branded pharmacies. Annual sales last year were $180bn, up from $120bn two years ago, thanks to its acquisitions. Operating in 20 countries worldwide, it is primarily a North American operation, generating 80pc of its group revenue in the US. The company's operating profit is $3bn, with an impressive compound annual growth of 17pc in the last four years.

The merger has set out to prove it has synergies. McKesson is the best in class for supply chain management which should help profitability in Europe.

Celesio brings experience in retail which should help McKesson add value. The deal may also be timely as US President Barack Obama's healthcare policy is shaking up the industry.

McKesson shot to fame two years ago when reports said its chairman/CEO John Hummergren had pension benefits of $160m - a US record.

To some this is the result of a value creation plan. To others it is a culture, where success depends on the top executives 'earning' more and the employees less.

However, it would appear that few investors are complaining, given the impressive share price growth and it expects earnings per share to grow even more in the next four years. An investment in McKesson during the last five years has been richly rewarded, the share price moving from $40 to a 10-year high of $240 earlier this year. Today it trades just below $200 with a lofty price earnings multiple of 24 and a market value of $46bn.

McKesson has a reputation of being a well-run company. There is no reason that its magic cannot work on the newly acquired Celesio. The shares are worth considering allowing for currency risk.

In the meantime, the German business sector still has its rear gunners briefed to spot troublesome hedge funds coming at them out of the sun.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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