McKesson Plans to Buy PSS World Medical for $1.62 Billion

McKesson Corp., the largest U.S. drug distributor, agreed to acquire PSS World Medical Inc. for about $1.62 billion to expand in medical supplies and services.

The $29-a-share cash agreement for Jacksonville, Florida-based PSS World includes the assumption of debt, McKesson said today in a statement. The offer by San Francisco-based McKesson is 34 percent more than PSS World’s closing share price yesterday. The deal includes the assumption of about $480 million of debt, bringing its total value to $2.1 billion.

McKesson will acquire PSS World’s distribution of medical products to physician offices and long-term care homes and gain the company’s $2.1 billion in annual sales. Cost savings will be about $100 million a year within four years, McKesson said.

“It is mostly about scale,” said Jeff Jonas, co-portfolio manager of the Gabelli Healthcare & Wellness Trust fund, in an e-mail. “The combined company will be significantly bigger and the $100 million in synergies is reasonable given savings in warehouses, delivery, and slightly better purchasing from the manufacturers.”

PSS World has also been selling private-label brands, and has a strong presence in diagnostic tests. That could help McKesson grow in those areas. Jonas’s firm owns McKesson shares and not PSS World.

McKesson gained 4.1 percent to $93.16 at the close in New York. PSS World rose 32 percent to $28.57.

500 Takeovers

There have been more than 500 takeovers in the U.S. medical products industry in the past five years, totaling almost $26 billion, according to data compiled by Bloomberg.

McKesson is paying about 11 times earnings before interest, taxes, depreciation and amortization for PSS World, the data show. That compares with the median of 15 times Ebitda paid in a survey of more than 20 comparable deals since 2007.

“We view this deal positively as it should help McKesson to expand its presence and sustain margins in medical distribution,” said Ross Muken, an analyst with International Strategy & Investment Group in New York. The acquisition will add 20 cents to 25 cents a share to McKesson’s full-year earnings next fiscal year, he said in a note to clients.

The companies have known each other for a long time as competitors and the door opened on a deal after they talked about McKesson buying PSS World’s long-term care business unit, McKesson Chief Executive Officer John Hammergren said on a conference call today.

Long-Term Relationship

“We’ve had a long-term industry relationship,” he said on the call. “Off and on over the year, we’ve had lots of conversations about opportunities.”

The deal will slightly slow the company’s current share repurchase program, said McKesson Chief Financial Officer Jeff Campbell.

“We are likely to do a little less share repurchase than we otherwise would have done in the short term,” Campbell said. McKesson’s board authorized $700 million in additional buybacks in April, bringing the program to $1 billion.

Peter J. Solomon Co., an investment bank based in New York, acted as financial adviser for McKesson, and Simpson Thacher & Bartlett LLP was the legal adviser. Goldman Sachs Group Inc. and Credit Suisse Group AG advised PSS World, and Alston & Bird LLP was legal adviser.

Separately, McKesson reported fiscal second-quarter earnings excluding one-time items of $1.92 a share, beating the $1.78 average of 15 analyst estimates compiled by Bloomberg. Sales of $29.9 billion fell short of analyst expectations of $30.9 billion.

McKesson in January agreed to spend about $918 million for the marketing and franchising businesses of more than 1,000 Canadian independent pharmacies, buying Drug Trading Co. and Medicine Shoppe Canada Inc. from Katz Group Canada Inc., a closely-held Edmonton, Alberta-based company.

In 2010, McKesson bought US Oncology Inc. for about $2.2 billion including debt. The deal gave McKesson an increased range of clinical tools for doctors.