McKesson Is Exploring a Sale of European, U.K. Businesses

McKesson Corp. is in talks to sell its European operations, including a sprawling drug distribution business and Britain’s Lloyds Pharmacy chain, in a move that would reverse its $8.3 billion purchase of Celesio AG in 2014, people with knowledge of the matter said.

The U.S. company is negotiating a sale of its continental European unit to the billionaire Merckle family’s Phoenix Group, the largest German pharmaceutical wholesaler, the people said. It is also in discussions to offload its U.K. arm, which includes Lloyds Pharmacy and distributor AAH Pharmaceuticals, to a private equity firm, the people said, asking not to be identified because the information is private.

A divestment would rank as one of the largest transactions in the European health-care industry this year. McKesson’s continental European and U.K. businesses could be valued at $3 billion to $4 billion, according to Bloomberg Intelligence.

“It’s been a big-time underperformer and management distraction for a while, so I think they’re focusing on their core business in the U.S.,” Bloomberg Intelligence analyst Jonathan Palmer said. “They will probably take that cash and see where they can either invest in growth markets, or do something more shareholder-friendly like buybacks.”

Irving, Texas-based McKesson is working with advisers on the potential divestments, the people said. While talks are advanced, they could still be delayed or fall apart, according to the people. A spokesman for McKesson said the company “doesn’t respond to rumors or speculation.” A representative for Phoenix declined to comment.

Phoenix’s Revival

Shares of McKesson gained as much as 1.9% in U.S. trading Tuesday. They were up 0.7% at the close in New York, giving the company a market value of about $29 billion.

McKesson is one of three dominant drug distributors in the U.S., alongside AmerisourceBergen Corp. and Cardinal Health Inc., and has played a key role in distributing Covid-19 vaccines. The company said earlier this year that delivering vaccines and other supplies for fighting the virus would lead to stronger earnings in 2021.

The potential acquisition would finalize a significant turnaround for Phoenix, which is part of the Merckle family’s business empire spanning drugs to building materials. The wealthy clan considered selling the business more than a decade ago as it was grappling with a mountain of debt and wrong-way bets on the stock market.

The financial crisis at the time culminated in the suicide of Phoenix’s billionaire founder, Adolf Merckle, leading his son Ludwig to sell off other assets and push for a turnaround at companies including Phoenix and HeidelbergCement AG.

Phoenix has since bounced back, steadily increasing sales to more than 28 billion euros ($33 billion) in the latest financial year. It has operations in 27 countries and 39,000 employees, including 161 distribution centers as well as 2,800 of its own pharmacies, according to its website.

Unwinding Takeover

A sale by McKesson would cap a series of moves to undo its takeover of Celesio, which it announced it was buying in 2013 for $8.3 billion, including debt. That deal was completed the following year and has been the company’s largest acquisition since 1998, according to data compiled by Bloomberg.

Since then, McKesson has announced a pact in 2019 to combine its German operations with Walgreens Boots Alliance Inc. AmerisourceBergen, meanwhile, is bulking up in Europe after agreeing to buy Walgreens’ business on the continent for $6.5 billion in January.

Bloomberg Intelligence’s Palmer said he viewed the German partnership with Walgreens as the first step toward a bigger divestment by McKesson in the region.

“A divestiture of the underperforming unit would optically improve its profitability and growth metrics,” he wrote in a research note Tuesday.

Deal Spree

Medical supply companies have been attracting takeover interest this year. A private equity consortium agreed this month to buy Medline Industries Inc., which provides hospitals with products ranging from surgical gloves to lab equipment, in one of the biggest-ever leveraged buyouts. The purchase is valued at more than $30 billion, people with knowledge of the matter have said.

The health-care sector has become one of the main drivers of a resurgent market for mergers and acquisitions. Health-care deals valued at almost $320 billion have been announced globally since the start of January, according to data complied by Bloomberg. That’s up about 271% from the same period in 2020.

A potential sale of Lloyds Pharmacy, which dispenses more than 150 million prescriptions a year, comes at a time when the chain is facing government funding cuts. It has more than 1,400 sites across the U.K., many located in doctor’s offices, and employs about 17,000 people, according to the company’s website. Its main rival is the Boots pharmacy chain, which is now owned by Walgreens.

Lloyds Pharmacy reported revenue of nearly 2 billion pounds ($2.8 billion) in the year through March 2019, according to its most recent results filed with the U.K. Companies House. It reported a pre-tax loss of 197 million pounds. The company said it decided to shed 60 stores as its business faced exceptional challenges due to reductions in drug reimbursements.

©2021 Bloomberg L.P.

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