UPDATE 2-Elliott buries hatchet with McKesson over Celesio

Fri Jan 24, 2014 11:50am EST

* McKesson takeover bid succeeds at second attempt

* Elliott vows to abstain from further disruption - source

* Shares reach 3-1/2 year high as buyers bank on premium

* Minority investors eye perks from domination agreement (Recasts with source, analyst comments, updates shares)

By Arno Schuetze and Ludwig Burger

FRANKFURT, Jan 24 (Reuters) - Hedge fund Elliott has called an end to its fight with McKesson over the drugs distributor's acquisition of German peer Celesio, selling its shares and vowing not to disrupt the deal further, a source familiar with the transaction said.

Elliott, led by U.S. investor Paul Singer, sold its stake to Celesio's largest shareholder Haniel, which then tendered a combined stake of more than 75 percent of Celesio shares to McKesson, including those from bonds that convert into shares.

McKesson is buying Celesio as part of its drive to become a global leader in drugs distribution and boost its bargaining power with pharmaceutical firms such as Novartis and Teva. A previous bid foundered after failing to secure the 75 percent shareholder support it had set as a condition.

Celesio's new owner said it would now enter into a so-called domination and profit-and-loss transfer agreement with the German business, which will allow it to take full control and gain access to its cash flows.

As part of the procedure, McKesson will have to compensate minority shareholders forced to relinquish their holdings by the domination agreement.

A source familiar with the matter said Elliott accepted the transaction and would not join any move by minority investors to seek a higher price for any remaining shares and bonds - a strategy it employed during the takeover of German cable firm Kabel Deutschland.

Elliott declined to comment, while officials at McKesson were not immediately available for comment.

Elliott, which invested more than 1.3 billion euros ($1.8 billion) in Celesio shares and convertible bonds over the course of the drawn-out takeover process, had pressed McKesson to hike its offer.

McKesson gave way on Jan. 9 and bumped up its bid by 50 cents to 23.50 euros a share.

Sources familiar with the transaction said Elliott, which bought the shares at an average price of 23 euros apiece, made the bulk of its profit from its convertible bond holdings rather than from selling its shares.

McKesson declined to comment on the price it paid for the bonds held by Elliott. But it will have to disclose that at later stage, the source familiar with the transaction said.

"Given the huge size of Elliott's bet it's hardly conceivable that they did all this for (a return of) just 2 percent," a hedge fund manager holding a sizeable stake of Celesio convertible bonds said, referring to the profit Elliott would have made on the shares.

McKesson said it was launching a new offer with the same 23.50 euro price to the remaining Celesio shareholders without setting a minimum acceptance threshold. The offer documents are expected to be published over the next 10 days.

However, Celesio shares on Friday traded 7 percent above McKesson's offer price, indicating that buyers are holding out for a premium because the U.S. company is seeking 100 percent ownership.

"The current price level is appropriate, even though the premium on the 23.50 may appear excessive," Equinet Bank analyst Konrad Lieder said.

Lieder said the price was justified by the likely compensation McKesson would have to pay remaining shareholders.

"If the share price stays where it is, it looks like 25 percent of the registered capital is playing the back-end," a Celesio shareholder said, referring to the strategy of holding out for higher compensation.

($1 = 0.7307 euros) (Additional reporting by Alexander Hübner and Frank Siebelt; Editing by Philipp Halstrick and Mark Potter)