Market Overview

Elliott Issues Response: Says Won't Tender Shares to McKesson Offer for Celesio


Elliott Associates, L.P. and Elliott International, L.P. together with affiliated entities ("Elliott"), which own or have an interest economically equivalent to over 25% of Celesio AG (1), announced today that Elliott intends to decline McKesson Corporation's (NYSE: MCK) tender offer for the outstanding shares and convertible bonds of Celesio. Elliott released the following statement regarding its decision:

Elliott believes that McKesson's offer for Celesio substantially undervalues the company and is not in the best interests of Celesio shareholders and bondholders. As a result, we do not intend to tender our shares or bonds.    

Simply put, Elliott believes that Celesio's shareholders and bondholders are not getting a fair deal at the current price. The analyst community seems to agree with Elliott's view that the amount of synergies announced by McKesson understates the true potential of this transaction (2). Given the value McKesson stands to gain from the substantial realizable economies of scale, Elliott believes the price offered fails to appropriately compensate Celesio shareholders and bondholders for this upside potential.

McKesson's management has openly acknowledged that it is getting a very advantageous deal, recently stating that because of a "myriad of issues" affecting Celesio, "the opportunity for us is that we can buy this asset at a reasonable price" (Credit Suisse Healthcare Conference, 12 November, 2013). The market agrees - McKesson's market value has increased by about $7.7 billion since October 7 ^th , 2013, which was the last undisturbed trading day before news articles were published suggesting a transaction between McKesson and Celesio. The increase is equivalent to 140% of Celesio's market value today.  

Furthermore, McKesson's management has stated that it expects this acquisition to be highly accretive as early as one year into McKesson's potential ownership ("We estimate this transaction to be $1 to $1.20 accretive in the first 12 months following the successful completion of the tender offers" - Q2'14 earnings call, 24 October, 2013) (3).

Elliott estimates that McKesson could still benefit from the accretive nature of this transaction while paying a fairer price to all Celesio shareholders and bondholders, because every incremental euro offered per Celesio share (or corresponding amount per bond) only reduces the accretion amount by $0.03 (4).

Moreover, broader equity prices have gone up significantly since October 7 ^th , 2013, cutting into the value of McKesson's "premium," which was insufficient to begin with. With the S&P up 7.9%, the DAX index up 7%, and Celesio's comparables (excluding McKesson) up 10.3% since the deal speculation began, McKesson's offer has been rendered even less adequate (5).

Finally, we believe Celesio has other paths to maximize shareholder and bondholder value. One alternative would be to sell the wholesale business to a strategic bidder and the pharmacy business to a separate buyer. Even on a standalone basis, Celesio has been a company on the mend for some time now, and a turnaround was underway long before McKesson came in with its offer.

Given the above, we do not intend to tender unless McKesson offers fair compensation to all Celesio shareholders and bondholders.

 1. Calculated in accordance with Section 25a of the German Securities Trading Act (Wertpapierhandelsgesetz/WpHG), in connection with Sections 21, 22 and 25 WpHG.  2. "Given the savings that AllianceBoots and Walgreens should achieve as part of their deal, McKesson's guidance from the Celesio deal seems very conservative. Walgreens and AllianceBoots should generate savings of about 7% of the combined generic purchases of the two companies. When McKesson announced its deal for Celesio in late 2013, the company detailed a synergy range of $275-325 million, or only 4.0%-4.5% of total generic purchases." (Deutsche Bank, 20 November 2013) "Synergy target of $275-$325 million over four years represents ~1% of CLSG total COGS or ~5-6% purchasing savings on CLSG's generic book. … This compares to WAG/AB generic purchasing synergies of $500 million (~1.7% of AB total COGS or ~10-12% of AB's generic book) over a similar period." (Morgan Stanley, 24 October 2013)  3. Based on FY 2015 EPS consensus estimates for McKesson on 22 October, 2013, management's guided range would represent accretion of 10.7% - 12.8% in the first full year of potential ownership.  4. Elliott accretion analysis based on research analyst estimates for McKesson and Celesio operating results and cost of financing (assuming 30% of McKesson announced synergy amount realized in year one).  5. All figures calculated as of close of trading on 9 December, 2013.

Posted-In: News


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