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Another Acquisition on the Cards for McKesson?

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Shares of McKesson Corporation (MCK - Free Report) surged 3.16% on Oct 8, 2013, after reports from agencies like Reuters and Wall Street Journal suggested that McKesson is in advanced talks to acquire Germany-based drug distribution company Celesio for approximately $5 billion.

McKesson is one of the largest healthcare services company in the U.S. The company delivers pharmaceuticals, medical supplies and health care information technologies to the healthcare industry.

On the other hand, Celesio provides logistics and services in the pharmaceutical and healthcare sector with operations in approximately 14 countries. Celesio generated revenues of more than €22 billion in 2012. The company serves over 2 million customers and supplies to over 65,000 pharmacies. Franz Haniel & Cie GmBH owned approximately 50.0% of total shares outstanding at the end of 2012.

Another Acquisition for McKesson…..

The potential acquisition, if it goes through, will allow McKesson to gain a foothold In Europe, thereby geographically expanding its core operations further.

McKesson has been actively pursuing deals and acquisitions to drive growth. We remind investors that McKesson acquired PSS World Medical in Feb 2013 for $1.9 billion. The acquisition has significantly bolstered McKesson’s Medical Surgical Distribution business thereafter.

In Dec 2010, McKesson acquired US Oncology Holdings for approximately $2.1 billion, thus expanded its existing specialty pharmaceutical distribution business.

Additionally, McKesson undertook a number of strategic actions earlier in 2013 to combat the challenges that it expects to face in the coming quarters and focus better on its core competencies of drug distribution. Consequently, McKesson decided to exit to minority investment in Nadro, a privately held pharmaceutical distributor in Mexico, where the company has a 49% stake.

McKesson has also decided to realign its structure in the Technology Solutions segment and sell its International Technology and Hospital Automation business.

Meanwhile, most leading players in the pharmaceutical distribution business are scurrying to enter into strategic deals to augment their business further given the current slowdown in generics.

We note that rival AmerisourceBergen (ABC - Free Report) entered into a strategic agreement with Walgreen and Alliance Boots GmbH earlier in 2013. The agreement includes a ten-year pharmaceutical distribution contract with Walgreen and access to generic drugs and related pharmaceutical products through the Walgreens Boots Alliance Development joint venture. In return, both Walgreens and Alliance Boots have been granted rights to jointly purchase a minority equity position in AmerisourceBergen.

Earlier, in 2012, Walgreens acquired a 45% stake in international pharmacy-led health and beauty group Alliance Boots GmbH for approximately $6.7 billion.

Our View

We believe the acquisition, if it goes through, will definitely boost McKesson’s business given Celesio’s extensive network. However, given the size and stature of the potential acquisition, integration of operations and systems will be a daunting challenge for McKesson.

We expect investor focus to remain on updates from the company on the potential deal.

McKesson currently carries a Zacks Rank #2 (Buy). Right now, Cardinal Health (CAH - Free Report) looks more attractive with a Zacks Rank #1 (Strong Buy).

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