McKesson may follow AmerisourceBergen into EU

McKesson, AmerisourceBergen and Cardinal Health handle about 95% of the drug distribution market in the U.S. Now it looks like at least two of them will face off in Europe. Months after AmerisourceBergen struck a deal to distribute drugs for Walgreen's and Alliance Boots in Europe and the U.S., McKesson is said to be negotiating a $5 billion deal to buy Germany-based wholesale distributor Celesio.

The Wall Street Journal cites sources that say McKesson could offer a 30% premium for Celesio, putting a bid at close to €22 a share. Some analysts find the idea intriguing given that McKesson has limited experience in Europe and would be expanding at a very difficult time, Reuters reports. Governments are keeping a tight lid on drug prices, while a price war in the German market has broken out among Celesio and other distributors, including Alliance Boots.

"Making direct moves into Europe is not without risks," Berenberg analyst Scott Bardo pointed out to investors in a note on the report. "The European wholesale market is complex, low-growth and subject to continued competitive and regulatory pressures."

At the same time, it might allow McKesson to get in on the cheap, and a merger like this would give it better negotiating power with global drugmakers on prices, the WSJ points out. That was a big motivation for Walgreen's decision last year to pay $6.7 billion for a 45% stake and option to buy the rest of wholesaler and retailer Alliance Boots. The company said the merger would save it $1 billion by 2016. It then turned around and struck a deal to invest in AmerisourceBergen and give it some of its distribution business.

Right now, WSJ says that McKesson has operations in only three European countries, while Celesio operates in 16 countries, mostly in the EU. But Celesio also has operations in Brazil, one of the fast-growing emerging markets, which would be an added bonus if McKesson pulls the trigger on a deal.

- here's the Reuters story
- read the Wall Street Journal story (sub. req.)