Mizuho Analysts Call McKesson's UDG Buyout 'Nice'

In a recent report, Mizuho analysts qualify McKesson Corporation MCK’s purchase of the pharmaceutical distribution division of UDG Healthcare as a “Nice Opportunistic Use of Cash.”

The experts rate the –former- stock a Buy, setting a price target of $275.00.

Shares of McKesson are down almost 1 percent on Monday trading.

McKesson recently announced it will acquire UDG Healthcare’s pharmaceutical distribution division (including the UnitedDrug supply chain services segment and TCP Group in Ireland, and MASTA, its British vaccine distribution business) for $449 million in cash. These business segments generated aggregate revenue of $1.5 billion and aggregate EBITA of $33 million in 2014. The deal is expected to close in the first half of next year.

The experts highlight thee main issues related to the purchase:

1)   McKesson projects that the deal will be $0.10-$0.14 accretive in its first year. This means it paid a forward year EV/EBITDA multiple of 11-12x, which looks pretty reasonable to Mizuho analysts Ann Hynes and Tim McDonough – compared to other deals in the arena. The experts expect synergies to derive from “purchasing and overhead efficiencies which should allow MCK to improve profitability of the assets being acquired.” However, they note that the assets the company acquired retrieved an operating profit margin of 1.7 percent in the first half of 2015 – versus McKesson’s 2.4 percent.

2)   The analysts explain that, in their view, the acquisition allows McKesson to increase its presence in main European markets “consistent with its stated goal of increasing its presence internationally, while also allowing UDG to streamline its business around higher-margin services offerings.” While the deal is not expected to be deeply accretive financially, it “should help to offset the likely loss of business from recent acquisitions of MCK customers,” the report expounds.

3)   The acquisition underscores the increasing importance of scale in the worldwide pharma distribution market, the analysts add. In fact, they believe “consolidation across the global pharmaceutical supply chain is indicative of the increased importance of scale and buying power. MCK represents a likely exit strategy for sub-scale operators, which should provide a continued source of accretive bolt-on M&A going forward,” they conclude.

 

Disclosure: Javier Hasse holds no stakes in any of the securities mentioned above.

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Posted In: Analyst ColorLong IdeasNewsHealth CarePrice TargetReiterationM&AAnalyst RatingsTrading IdeasGeneralAnn HynesHealth CareHealth Care DistributorsmizuhoTim McDonoughUDG Healthcare
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