UPDATE 3-Celesio drops, but fresh bid talk limits decline

Tue Jan 14, 2014 1:33pm EST

* Shares down 4 pct after U.S. bidder fails to get 75-pct acceptance

* McKesson says was only offered 72.33 pct in Celesio

* Some investors speculate on renewed bid, eyes on Elliott fund

* Celesio, McKesson both say able to succeed alone

* McKesson CEO cites joint ventures as possible alternative (Adds details on tender, convertible bonds)

By Ludwig Burger, Arno Schuetze and Alexander Hübner

FRANKFURT, Jan 14 (Reuters) - Shares in German drug distributor Celesio dropped 4.4 percent on Tuesday after the failure of an $8.4-billion bid from McKesson Corp but talk of a new offer from the U.S. wholesaler limited the decline.

Market participants said there was speculation that New York hedge fund Elliott, which has built a stake of nearly a quarter in Celesio since October, was adding to its stake and this helped the shares recover from an early dip of over 8 percent to end down 4.4 percent at 23.10 euros - a third higher than before talk of McKesson's bid surfaced three months ago.

An Elliott Management Corp spokesman declined comment. People familiar with the matter said the fund had pledged all its 22.7-percent stake in Europe's market leader to the bid.

McKesson, the biggest U.S. drugs distributor, said on Tuesday it fell less than 3 percent short of its condition of 75 percent of shares being pledged to its 23.50-euro offer. Its chief executive had said on Monday after the failure of the bid that it would move on to build its business in other ways.

Celesio and Haniel, a German family holding company that owns 50.01 percent of it, voiced regret that the bid had failed on Monday but said the firm would pursue its own development.

However, analysts and investors said that, with the shortfall in acceptances so narrow and a trend in place across the sector toward consolidation, a further bid for Celesio from McKesson seemed a strong possibility - encouraging speculators to build up short-term stakes in the Stuttgart-based firm.

"We believe it is possible McKesson may look to launch another bid for Celesio," Jefferies analyst James Vane-Tempest wrote in a note to investors.

"Our 19-euro price target reflects the rerating of the market as well as an element of a bid premium, as we see the possibility for renewed interest in Celesio by McKesson."

Cowen analysts said: "While we don't think (McKesson) 'needs' Celesio to be successful ... we think given the direction the market is moving with the creation of larger purchasing entities, it is more likely than not (McKesson) will want to participate at that level as well."

There may be a good deal of brinkmanship before any new offer emerges, however. A person familiar with McKesson's thinking told Reuters there would be no comeback on the attempt to buy Celesio, formerly the Gehe group, whose units include OCP in France and Britain's AAH and Lloyd's Chemists.

READY TO GO IT ALONE

McKesson improved its offer by 0.50 euro last week.

People familiar with the matter said Elliott had tendered its entire stake - but that it secured a higher price than 23.50 for those shares it controls through convertible bonds.

Elliott and McKesson declined comment on the price.

McKesson's 75-percent threshold for completing its offer was based on an assumption that all outstanding convertible bonds would become shares, diluting existing holdings. Conversion would dilute Haniel's total stake to 41.8 percent.

Adding that to the fully diluted 22.7 percent held by Elliott, McKesson had secured close to 65 percent of Celesio, while further pledges from other shareholders brought the level of acceptances by the deadline to 72.33 percent, McKesson said.

Some investors may now be encouraged to amass a stake large enough to dangle in front of McKesson to clinch a deal - though convertible bond holders may demand more than the equivalent of 23.50 euros a share, given talk of Elliott getting a mark-up.

For now, McKesson Chief Executive John Hammergren has said his strategy may not include Celesio:

"Although we remain optimistic that we will continue to find ways to add value to our company through capital deployment and continued scale, it is not clear to us that Celesio will be part of that," he said on Monday.

Shares in San Francisco-based McKesson, which ended last week at $175.44, have also suffered. They were trading at midday in New York at $166.10, down 5 percent since Friday.

Hammergren said on Monday he had spoken to Celesio about "various alternatives" to a takeover: "Clearly a joint venture would be an alternative to consider," he said.

Berenberg Bank analyst Scott Brado said: "These statements appear to pour cold water on the notion that any imminent counter-offer from McKesson is likely."

Tie-ups and alliances are still seen as the way forward for the high-volume industry, where operating profit margins of 2 percent and less are common and where the slightest improvements in procurement and costs make a difference. Bigger buying power can drive down prices paid to drug manufacturers.

U.S. expenditures on medicines reached about $330 billion in 2012, compared with $145 billion in Europe's five largest drug markets alone, according to market researcher IMS Health. Most of this volume finds its way from the drugmakers to the pharmacies or hospitals through intermediaries.

German takeover rules would allow McKesson to resurrect its bid, but it would have to get Celesio's approval for such a move if it wanted to repeat its attempt within a year.

McKesson could also renew its agreement with Haniel, to purchase its existing, undiluted 50.01-percent stake. That would trigger a mandatory takeover offer for the remaining shares for a price of at least the three-month trading average. (Editing by Christoph Steitz, Mark Potter and Alastair Macdonald)

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