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McKesson $8.3 billion deal for drugs trader Celesio to create market leader

By Ludwig Burger

(Reuters) - McKesson agreed to buy German peer Celesio on Thursday for $8.3 billion, including debt, forging a global market leader in drugs distribution to boost its purchasing power with pharma majors.

San Francisco-based McKesson, the largest U.S. drugs wholesale group, struck a deal to purchase the 50.01 percent stake in Celesio owned by the diversified holding company Franz Haniel & Cie and is offering to buy up the remaining shares for 23 euros ($31.7) apiece, it said on Thursday.

McKesson and its closest U.S. rivals, AmerisourceBergen and Cardinal Health, have all been looking to grow beyond their domestic market, where they command a combined 95 percent share.

U.S. President Barack Obama's healthcare reform is also putting pressure on costs across the sector.

"Celesio has some very strong brands across Europe including Lloyds pharmacy and this deal gives McKesson some muscle to flex across Europe," B. Riley & Co analyst Gene Mannheimer said.

Mannheimer said though the price may look rich, there are "very clear synergies and cost savings that McKesson can capture."

In a high-volume industry, where operating profit margins of 2 percent and less are common, the slightest improvements in procurement and costs make a difference.

McKesson expects the deal to result in annual savings of between $275 million and $325 million by the fourth year.

Separately, McKesson also reported a quarterly profit that topped analysts' estimates.

As part of the largest German healthcare deal since drugmaker Bayer bought rival Schering in 2006, McKesson will gain about 22 billion euros ($30.3 billion) in annual revenues from Celesio, creating a more than $150 billion global drugs wholesale and pharmacies group.

That would far eclipse another transatlantic tie-up in drugs trading, the purchase of a 45 percent stake in European pharmacy chain Alliance Boots by U.S. peer Walgreen Co last year.

They have close to $110 billion in annual revenues but are looking to bulk up further as they secured the right to buy up to 23 percent of AmerisourceBergen in March.

HEADACHE

Seller Haniel, a 257-year-old family-owned conglomerate, has been shedding assets to pay down its debt and offset a massive writedown on its holding in German retailer Metro MEOG.DE last year. This year, the more than 600-member Haniel family had to forgo a dividend for the first time since the end of World War Two.

Celesio, owner of Britain's Lloyds pharmacy chain, has been a headache for Haniel.

It was embroiled in price war that has all but erased profits from the crowded German drugs wholesale market. Healthcare cuts across Europe, its main market, added to woes.

"After a particularly challenging 5-6 years, we congratulate Haniel for realizing a good deal for both itself and minority shareholders," Berenberg analyst Scott Brado wrote in a note to investors.

Celesio Chief Executive Marion Helmes has conceded that an alliance or tie-up with a U.S. partner could help win steeper discounts, mainly for the generic drugs it buys but also for non-prescription medication and skincare products.

McKesson will also make a public tender offer for the outstanding convertible bonds of Celesio, offering 53,117.78 euros for each of Celesio's outstanding convertible bonds due in 2014 DEA1AN5K= and 120,798.32 euros apiece for those due in 2018

DEA1GPH5=.

The 23 euro per share bid represents a premium of about 43 percent over the stock price since speculation began in June that majority owner Haniel might sell its stake.

The total transaction, including the assumption of Celesio's outstanding debt, values the target at about $8.3 billion (6.1 billion euros), McKesson added. Celesio said its management and supervisory boards welcomed the offer.

Shares in Celesio traded 4.9 percent higher at 0812 GMT at 22.79. They had closed up 6.1 percent at 21.725 euros on Wednesday, after Reuters cited people familiar with the talks as saying a bid of near 23 euros per share was imminent. McKesson's stock rose 0.7 percent to close at $143.05 on Wednesday.

McKesson plans to fund the deal from cash reserves and bridge financing, while seeking to retain its credit rating, it said. Standard & Poor's rates the group's long-term prospects

"A-".

It expects the deal to add between $1.00 and $1.20 to its adjusted earnings per share in the first 12 months following completion, provided it gets 100 percent of Celesio. Its offer is conditional upon it obtaining at least 75 percent.

McKesson said it expected its offers for Celesio's shares and bonds to start during the quarter through December, and conclude it by March 31, but not before January 17.

The offer values Celesio including its debt at about 11 times expected earnings before interest, taxes, depreciation and amortization (EBITDA) for this year, above the 9.8 multiple its U.S. suitor is trading at.

That is in line with the multiple that Walgreen Co paid for the stake in Alliance Boots last year.

(Additional reporting by Esha Dey in Bangalore and; Maria Sheahan and Frank Siebelt in Frankfurt, editing by Elizabeth Piper)

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