* Sees synergies in excess of $100 mln from deal
* McKesson reports Q2 adj EPS $1.92 vs est $1.78
* Q2 rev $29.9 bln vs est $30.91 bln
By Zeba Siddiqui and Adithya Venkatesan
Oct 25 U.S. drug wholesaler McKesson Corp
struck a deal to buy medical products distributor PSS
World Medical for $1.46 billion to boost scale and
margins in its surgical devices supply business as medical
procedure volumes fall.
Patients have been reluctant to spend on elective procedures
in a weak economy, hurting sales at the companies making
surgical devices, as well at the distributors, such as McKesson,
that supply them.
Analysts termed the deal a good buy, despite PSS's
not-so-impressive financial performance over the last five
"This is, I think, a happy marriage for both sides, in that
you're bringing the strong operational expertise of McKesson,
(and) you're bringing the pretty good customer and sales network
of PSS (together)," ISI Group analyst Ross Muken said.
The offer of $29.00 per share in cash, is 34 percent higher
than PSS's stock close on Wednesday.
PSS shares, which have lost more than 12 percent of their
value this year, were trading at $28.66 Thursday afternoon on
the Nasdaq, while McKesson shares were up 4 percent at $93.34 on
the New York Stock Exchange.
"It is not a particularly expensive deal. (It) allows
McKesson to help sustain margins in the medical distribution
market and overall, I think it is a good use of shareholder
capital," Muken said.
Including the assumption of PSS debt, McKesson valued the
deal at about $2.1 billion.
The acquisition could add between 15 and 30 cents per share
to McKesson's earnings in 2014, J.P. Morgan analyst Lisa Gill
estimated in a note to clients.
San Francisco-based McKesson, which counts drugstore chains
CVS Caremark and Rite Aid Corporation among its
customers, said it expects to realize annual synergies of more
than $100 million by the fourth year following closing of the
McKesson has historically had a strong capital position,
which it has utilized to strengthen its distribution business,
making as many as eight acquisitions since January 2011.
McKesson reported cash and cash equivalents of about $2.83
billion as of Sept. 30.
Muken said Jacksonville, Florida-based PSS was the most
likely asset to be in play within the U.S. drug distribution
industry, adding that he does not expect any more consolidation
in the sector at this stage.
Fisher Scientific, now a unit of Thermo Fisher Scientific
had offered to buy PSS in 2000 for about $840 million.
The deal fell apart as both companies determined that it would
not be in the best interest of their shareholders.
McKesson on Thursday also reported a 35 percent increase in
its July-September net income to $401 million, handily beating
Excluding a pre-tax, non-cash charge, it earned $1.92 per
share in the quarter. Revenue fell by 1 percent to $29.9
Analysts on average expected McKesson to report a profit of
$1.78 per share, on revenue of $30.91 billion, according to
Thomson Reuters I/B/E/S.
The company tightened its fiscal 2013 earnings forecast
range and now expects a profit, excluding items, of between
$7.15 and $7.35 per share, against its earlier expectation of
$7.05 to $7.35 per share.
Peter J. Solomon and law firm Simpson Thacher & Bartlett
served as McKesson's financial and legal advisers. Goldman Sachs
Group, Credit Suisse Group <C SGN.VX> a nd law firm Alston and
Bird advised PSS World on the transaction.