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McKESSON FILLS IN NATIONAL SPECTRUM WITH SPECTRO PURCHASE FOR $161 MIL. CASH; SECOND MOVE IN ACQUISITION RACE GIVES McKESSON MID-ATLANTIC WHSLE. BASE

Executive Summary

McKesson's $161 mil. cash purchase of Spectro fills in one of the last major geographic holes in the mainland U.S. for McKesson's drug and health care distribution business. In a joint April 12 statement announcing the purchase, the two firms stated that the merger "creates the first truly national distribution system in the drug and health care industry." In addition to its New York state and New England distribution coverage, Spectro adds the major East Coast metropolitan region of Philadelphia, Baltimore and Washington to McKesson's national distribution coverage. With projected sales of $455 mil. in fiscal 1985 (ended March 31), Spectro will put McKesson's Drug and Health Care group sales over the $3 bil. mark and total corporate sales over $5 bil. Spectro's approximately $435 mil. drug sales were distributed from the whslr.'s five distribution centers in Baltimore and Landover, Md., Philadelphia, Pa., and Springfield and Worcester, Mass. Spectro also manufactures and distributes durable medical products, which generated additional sales of $15 mil. in fiscal 1984 on a 30% sales increase that year. McKesson Is Paying About 18 Times Earnings For Spectro And Access To 3,000 Customers In its most recent sales and earnings report, Spectro showed nine month sales of $311.7 mil. and net earnings of $6.6 mil. for the period ended Dec. 31. While the regional whslr.'s full year financials have not yet been reported, McKesson put Spectro sales at approximately $455 mil. for fiscal 1985. If the whslr. maintains its fiscal 1984 fourth quarter net margin of 2.1%, net income for the just-ended fiscal year should top $9 mil. At that net income level, McKesson's $161 mil. cash price for Spectro comes to approximately 18 times net earnings. That price compares favorably to the 25 times earnings FoxMeyer recently paid in its $60 mil. cash purchase of McPike, a $200 mil. whslr. based in Kansas City, Mo. Spectro is a strong regional whslr. with over 3,000 customers and a quarterly sales growth record of between 16% and 25% gains on a year to year basis for 13 straight quarters. In wooing Spectro, McKesson may have benefitted from Bergen's drawn out merger proceedings with National Intergroup. Bergen's attention for nearly half a year was focused on completion of that merger, which, now consumated, gives Bergen a sizable amount of cash to spend on further acquisitions. Bergen does not currently have distribution centers in either the Baltimore-Washington area or in Massachusetts. Under the merger agreement, McKesson is paying $20 per share for each of Spectro's 8.039 mil. outstanding shares. "The tender offer is expected to be commenced as soon as practicable (and) . . . will be followed as promptly as possible with a cash merger by which each Spectro share of common stock not acquired by McKesson in the tender offer will be converted into the right to receive $20 per share in cash," the release notes. McKesson also has an option to purchase 1.5 mil. newly issued Spectro shares. McKesson said that Spectro "is expected to be operated as a separate subsidiary" operated by current management "with Spectro employees expected to maintain their customer relationships."
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