UPDATE 1-Investor Elliott urges McKesson to sweeten Celesio bid

Tue Dec 10, 2013 10:15am EST

* McKesson offer undervalues Celesio - Elliott

* Breakup of Celesio could be alternative - Elliott

By Arno Schuetze

FRANKFURT, Dec 10 (Reuters) - Hedge fund Elliott International pressed U.S. drugs wholesale group McKesson for a mark-up on its $8.3 billion offer for German peer Celesio, triggering a standoff with hundreds of millions of dollars at stake.

"We do not intend to tender unless McKesson offers fair compensation to all Celesio shareholders and bondholders," Elliott said in a statement on Tuesday.

Elliott, run by U.S. investor Paul E. Singer, has spent roughly 800 million euros building a stake of more than 20 percent in Celesio over recent weeks and is now in a position where it can block the takeover.

McKesson agreed to buy Celesio in October for $8.3 billion, including debt, seeking to forge a global leader in drugs distribution to boost its purchasing power with pharma majors.

The activist investor has been on the prowl in Germany of late, building a large position in Kabel Deutschland, aiming to sue Vodafone for a better price, according to people familiar with the matter.

McKesson has said its 23 euro ($31.55) per share takeover offer is conditional upon it obtaining at least 75 percent of Celesio's shares, including those from the convertible bonds.

It struck a deal at the time to purchase the 50.01 percent stake in Celesio owned by the diversified holding company Franz Haniel & Cie but McKesson can also walk away from that agreement if it does not clear the 75 percent hurdle.

Elliott has 25.16 percent of the voting rights in the company. When shares from Celesio's two convertible bonds are taken into account, the investor's voting stake is 22.7 percent.

However, some funds, which track share indexes, cannot tender their shares before completion of the deal and usually another small percentage of a company's shares are held in accounts, whose owners do not tender.

The surge in McKesson's value by $7.7 billion since early October, when reports on a takeover offer appeared, was a clear sign the Celesio acquisition offers high synergies for the U.S. group and is a bad deal for minority shareholders, Elliott said.

"We believe Celesio has other paths to maximize shareholder and bondholder value," Elliott said, adding that one alternative would be to sell the wholesale business to a strategic bidder and the pharmacy business to a separate buyer.

Elliott declined to say if it has been in contact with groups such as Cardinal Health on Celesio's wholesale ops or with private equity on its retail unit Lloyds Pharmacy.

Cardinal had initially also been in talks to take a stake in Celesio, sources said in July.

Buyout group KKR counts its investment in pharmacy chain Alliance Boots as one of its most successful.

Celesio declined to comment. San Francisco-based McKesson was not immediately available outside normal office hours.