Activist Hedge Fund Seeks Higher Bid in Pharmaceutical Merger

LONDON, Dec. 10, 2013 (NEW YORK TIMES) -- Elliott Management, the New York-based hedge fund founded by Paul Singer, urged the McKesson Corporation on Tuesday to sweeten its deal to acquire the German pharmaceutical wholesaler Celesio, saying its tender offer to acquire the outstanding shares of Celesio ''substantially undervalues'' the company.

In October, McKesson, the health care services company based in San Francisco, announced that it had acquired a controlling stake in Celesio from Franz Haniel & Cie., the company's majority shareholder, and planned to start a tender offer for the remaining shares in a deal valued at $8.3 billion.

But Elliott, which has an economic interest in Celesio of more than 25 percent, said it did not plan to tender the shares or convertible bonds owned by its affiliated funds under the current offer.

''Simply put, Elliott believes that Celesio's shareholders and bondholders are not getting a fair deal at the current price,'' the hedge fund said. ''Given the value McKesson stands to gain from the substantial realizable economies of scale, Elliott believes the price offered fails to appropriately compensate Celesio shareholders and bondholders for this upside potential.''

Celesio declined to comment, and McKesson did not immediately respond to requests for comment on Tuesday.

The move by Elliott is the latest confrontation between activist shareholders and companies in Germany.

Elliott was one of several hedge funds that pressed Vodafone to raise its 7.7 billion euro offer for the German cable operator Kabel Deutschland this year. But Vodafone was able to secure sufficient backing by investors in September for the deal to go forward, following an initially tepid response to its offer.

ThyssenKrupp, the German steel maker and industrial giant, has also faced pressure from investors over its share price after an ambitious, but ill-fated effort to expand into the United States. While in a difficult overhaul, the company sold its Alabama steel mill this month for $1.55 billion to a joint venture owned by Nippon Steel & Sumitomo Metal and ArcelorMittal.

The McKesson-Celesio tie-up would create one of the world's largest pharmaceutical wholesalers and providers of logistics and services in the health care sector, with annual revenue of more than $150 billion and about 81,500 employees worldwide. The combined company would operate in 20 countries.

Both companies act as distributors that provide generic, branded and over-the-counter drugs to pharmacy chains, independent pharmacists and institutions like hospitals. Celesio also operates Lloyds, a British pharmacy chain.

The deal is expected to help the combined company in terms of purchasing power and a broader worldwide reach. The two companies have limited overlap across the global and would maintain their own brands.

On Tuesday, Elliott said it believed that McKesson could afford to pay a ''fairer'' price to shareholders and bondholders and still have a deal that would be highly accretive as early as the first year of the combined company.

Elliott noted that McKesson's market value had increased by about $7.7 billion since word of a possible deal emerged in October. The hedge fund also said stock prices had increased significantly since that time, cutting into the premium offered by the deal.

The hedge fund said there might be other ways to maximize value for shareholders and bondholders, such as selling the wholesale business to one strategic bidder and the Lloyds pharmacy chain to another buyer.

''Even on a stand-alone basis, Celesio has been a company on the mend for some time now, and a turnaround was underway long before McKesson came in with its offer,'' Elliott said.

Some recent European deals in the health care sector have fetched significant premiums. After an investor buyout led by the private equity firm Kohlberg Kravis Roberts of the British pharmacy chain Alliance Boots in 2007, Walgreens, the American pharmacy giant, agreed to pay $6.7 billion last year to buy nearly half of Alliance Boots.

McKesson is the largest of three wholesale distributors that account for 85 percent of the American drug market. Its main competitors in the United States include Cardinal Health and Amerisource Bergen.

Celesio, one of Europe's largest wholesalers, competes primarily in Europe with Alliance Boots and Phoenix Pharmahandel.

Shares of Celesio closed down 1 percent on Tuesday in trading in Frankfurt.
 

Posted: December 2013


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