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Paul Singer Acquires 21% Voting Position In German Company Celesio May Seek Greenmail in $5 Billion Bid

The Global Financial Context: Paul Singer

Paul Singer/ Getty

A regulatory filing last week revealed that billionaire Paul Singer’s Elliot management had acquired a 21.13% voting position in German pharmaceutical wholesaling company Celesio, which is based in Stuttgart.

Increasingly US hedge funds have been seeking international investments, particularly in Asia in recent years. Now that many observers think the Euro-zone’s economy may have hit bottom it is becoming picked over for good deals by a number of the top hedge funds.

Celesio is an interesting story. With 38, 000 employees, the company operates in 14 countries around the world and generated revenue of more than 22 billion euros (almost US$30 billion) in 2012. The company is part of the founding Haniel Group which presently holds a 50.01% stake in the company.

HANIEL LOGO

In recent years drug wholesaling, particularly on the European continent, has become a highly discounted business, which has adversely impacted the profits of Celesio and others though they have staged an improvement so far in 2013.

Accordingly, the largest US pharmaceuticals distributor the Mckesson Group three weeks ago announced a plan to buy Celesio for 3.9 billion euros (about US$5.2 billion), subject to at least 75% of the company’s voting shareholders approving the transaction.

Under the terms of the deal they propose, the Haniel family will sell its controlling stake to McKesson for 23 euros (about US$31) per share and McKesson would also then execute a tender offer for the rest at the same price. All conditional, on Mckesson receiving at least a 75% total uptake of course.

With the disclosure of Singer’s larger stake, which basically implies he believes the ending price for such a deal may be higher still – especially if he is sitting there in the middle as a potentially king-making “arb” (arbitrageur) – Celesio’s shares nevertheless reacted with a yawn moving up only very slightly to about 23.25 euros (US$31.1) in afternoon trading.

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Just two days ago Celesio had announced its third quarter results to September 30th, when they reported an increase in profit before tax for the nine-month period to 197.6 million euros (US$265 million), up from 157.4 million euros (US$211 million) last year, before certain adjustments.

After tax, the company reported a net profit of 120.8 million euros (US$162 million) in the nine-month period, compared with a loss of 182.5 million euros (US$245 million) it reported a year ago.

This year’s net income results included a net loss from discontinued operations of only 5.4 million euros (US$7.2 million), as against a net loss of 262.7 million euros (US$352 million) last year – the big difference between the two years’ results
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Group sales fell by 4.2 percent to 16 billion euros (US$21.7 billion), from 16.6 billion euros reported a year earlier. However, Celesio confirmed its forward guidance and said it still expects its top line earnings to be similar to last years for the full year.

Mckssom LOGO

Singer’s gambit of increasing his postion (from an earlier reported 11% stake) depends on the effect of German takeover rules which can sometimes permit a dissenting investor to say no to a takeover and seek a higher price in the courts. With the difficult market conditions in the pharmaceuticals wholesaling business evident for all to see however, there is of course no guarantee a higher price would be forthcoming. This represents therefore something of a high stakes game of chicken between Singer and the Mckesson Group. The Celesio shares were trading at only around 17 euros (US$22.8) up until the end of September before starting to climb, so the McKesson bid already reflects a 35% premium to the previous market.

With the long term being the kind of investment horizon most German investors are used to this kind of wild west, casino, style activist interventionism from Singer, seeking to get greenmail, may not go down all that well in the best German social and investment circles. Welcome to the future.

 

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