Last night North American health care distributor the Mckesson Corporation announced it had now agreed to purchase enough shares to reach its desired threshold to acquire a minimum of 75% of the shares of German health care distributor Celesio. The 75% threshold is important under German corporate law, and it will now allow McKesson to “dominate” its new subsidiary and drive a possible formal reorganization, and even a full merger, to more definitively give it full control of its new subsidiary.
Mckesson said it had achieved this important target holding in an effectively simultaneous, but formally consecutive, independent two-step process. First, by agreeing to buy, this time unconditionally, the entire shareholding holding of Franz Haniel & Cie, who represent the holdings of the founding family of Celesio, at about US$32.00 (Euros 23.50) per share. In a separate agreement McKesson also announced it was buying enough of Celesio’s convertible bonds from Paul Singer’s Elliott Management as well, to put it over the 75% threshold.
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Before all this started, Haniel had owned exactly 50.01% of Celesio’s shares itself, excluding dilution form convertible bonds. These were subject to an earlier, but at that time, conditional purchase agreement with McKesson announced last Fall, as reported by Jewish Business News. Paul Singer’s Elliott Management spotted an opportunity early on to play a blocking role and Elliott built up approximately a 24% position in the shares themselves, excluding the convertible bonds, as Jewish Business News reported in December . He also bought some of the convertible bonds too to put himself in the position of kingmaker to the deal.
Paul Singer/ Getty
Finally, when Mckesson made a follow up tender offer to all shareholders to acquire 100% of the company’s shares, including Elliott’s, the tender offer failed to achieve the 75% threshold – which includes convertibles – a week ago when it formally expired. Paul Singer had succeeded too well it seems, but Elliott was then potentially stuck with its own large holding, and even though Elliott had agreed at the last minute to tender its own shares too.
Accordingly, in the last few days since, there have been intensive behind the scenes negotiations to unravel the mess, leading to McKesson’s new announcement. The way the McKesson announcement is made is a little curious however. It seems to imply, either that the tender offer had itself brought in enough shares to get close enough to the 75% that Elliot’s bonds then just pushed it over the top, or that Elliott has now already agreed to sell on his own shareholdings, other than the bonds, to Haniel, who then agreed to sell them to McKesson.
Either way, McKesson will now enter into what is quaintly termed a “domination and profit and loss transfer agreement” with Celesio, through a holding company as the dominating party, and Celesio as the dominated party – pursuant to Sections 291 et seq. of the German Stock Corporation Act no less. This is just the language of German corporate law, with no sado-masochistic connotations at all.
Mckesson also still intends to make a voluntary tender offer to all the remaining holders of Celesio common shares as well, which it will commence after these initial transactions close within the next ten business days.
John H. Hammergren, Chairman and Chief Executive Officer, McKesson Corporation is therefore a happy man again, after pulling this off. First, he gets to keep his job, which might have been seriously threatened otherwise if it had all fallen apart. Second he gets to build a very exciting company now, which is obviously his preferred outcome. As he indeed said afterwards,
“We are excited to move forward with our acquisition of Celesio, ”…“We look forward to bringing together the strengths of the McKesson and Celesio organizations so we can provide our customers with more efficient delivery of healthcare products and services around the world.”
“Our customers will benefit from the increased scale, supply chain expertise and sourcing capabilities of the combined company, together with enhanced access to innovative technology and business services.”
If McKesson should eventually end up with 100% of the company under the subsequent tender offer, the deal would then represent about an US$8.3 billion dollar total enterprise valuation at this point, including Celesio debt assumed.
Looking forward a little, McKesson says it expects to fund a portion of the transaction with its own existing cash reserves, and has a bridge financing facility in place to fund the balance of the transaction, with permanent financing to be put in place following the close of the transactions.
Technically, once the deal closes McKesson will now be able to consolidate the financial results of Celesio during its fiscal fourth quarter ending March 31, 2014, when its earnings will reflect its proportionate share of Celesio’s earnings. McKesson says it expects the transaction to be $1.00 to $1.20 accretive to adjusted earnings per share on a fully diluted basis in the first twelve months following the close of the transactions – assuming 100% ownership is indeed achieved.
It is not yet entirely clear whether, once the dust settles, Elliott Management will have cashed in all his chips, or is going to stay on as a minority investor in Celesio if he has not yet already done so. It could be that in order to make a decent profit after all the trouble he has gone to, he might prefer the latter course, or even to swap his Celesio shares for shares in Mckesson itself at some point, which would be great for the McKesson balance sheet, and go along for the ride.
We look forward to finding out – indeed that is the fascination of these kinds of deals, they are living things that flow dynamically over time and are not simply one shot, static, transactions. A former mentor of this writer, who was Chairman of a very large company I worked for at the time told me once hoping to teach me something:
“making the deal is the easy part, living with it afterwards is the important part, and much harder as things never turn out quite as you expect.”
He was quite right.