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McKESSON's $100 MIL. PURCHASE OF MASS MERCHANDISERS MOVES WHSLR.'s SUPERMARKET MERCHANDISING OPERATIONS EAST OF ROCKIES; COMBINATION IS $500 MIL. SEGMENT

Executive Summary

McKesson's agreement to purchase Arkansas-based Mass Merchandisers Inc. will provide the whslr. with an increased supermarket serice merchandising presence in a 32-stae area east of the Rocky Mountains, the company said in a May 7 releae announcing the merger. The acquisition of Mass Merchandisers will be McKesson's second venture into supermarket service merchandising. McKesson took its first step in this area via the acquisition of West Coast rack jobber Rawson Drug and Sundry in November 1983. Rawson's primary business area is northern California, but the firm's distribution reach extend into Oregon, Nevada, and Arizona. In 1984, Mass Merchandisers reported sales of $326.3 mil., accompanied by net earnings of $5.5 mil. "By linking Mass Merchandisers and Rawson, the merger would create a $500 mil. a year service merchandise operation spanning most of the nation's major markets," McKesson Chairman Neil Harlan and Mass Merchandisers Chairman Frank Trestman commented in a joint statement. Discussing how the most recent acquisition fits in with McKesson's strategy, Harlan noted: "The combination of our core businesses and our recent acquisitions creates a unique national network for the distribution of a wide range of basic nondurable consumer products -- pharmaceuticals, health and beauty aids, nonfood items, wine and spirits, bottled water -- to a broad class of retail and medical customers, from drugstores, hospitals and veterinarians to supermarkets and mass merchandisers." H&BA's Account For Half Of Mass Merchandisers' $330 Mil. Sales; Firm Has 11,000 Customers In 32 States The nation's largest independent service merchandising company, Mass Merchandisers distributes over 16,000 products to supermarkets, superstores, combination stores, convenience stores and other retail outlets, the release notes. The firm also provides a number of services to its 11,000 customers including inventory supervision, pre-pricing, reordering, shelf stocking, merchandising and computerized management information, the release adds. Mass Merchandisers employes a "satellite distribution network." Of the company's 16,000 products, about 3,000 of its highest volume items, which account for roughly 70-75% of overall sales, are stocked and distributed by regional distribution centers in Harrison, Arkansas; Lincoln, Nebraska; and Ozark, Alabama. The remaining items are stocked and distributed from the firm's extended item warehouse in Harrison, Arkansas. According to the company's 1984 annual report, the system enables it to minimize inventory investment in slower moving items while maintaining high service levels. The release indicated that health and beauty aids account for approximately 53% of Mass Merchandisers' sales, which amounted for roughly $172.9 mil. of the firm's $326.3 mil. 1984 volume. Housewares and hardware represent another 22%, or $71.8 mil. in terms of 1984 sales. The balance consists of stationery and school supplies, automotive products, photo needs, pet supplies and softgoods, according to the release. "The combination of McKesson, which principally serves drugstores, and Mass Merchandisers, whose customers are largely supermarkets, would enable both companies to expand their customer base and services," the two companies stated. Since its acquisition of Rawson a year-and-a-half ago, McKesson has significantly built up the distributor's business. At the time of the merger, McKesson estimated Rawson's annual sales at "approximately $80 mil." Based on the estimate of combined Rawson and Mass Merchandisers' sales, Rawson's current sales have since doubled and are now annualizing at approximately $170-$180 mil. McKesson's expansion of its value added service business in the supermarket area reflects the growing position of that retail segment as an outlet for consumer goods, including OTCs and H&BAs. The whslr.'s appointment of former American Stores President Thomas Fields to president and chief operating officer last summer gives McKesson an insider's knowledge of the operating and merchandising needs of both drug and food retail outlets. According to Mass Merchandisers' Trestman, service merchandisers accounted for approximately one third of the estimated $14 bil. of whsle. nonfood items sold to supermarkets in 1983 and that foodstores accounted for 47% of all health and beauty aid sales. "With nonfoods generating high margins for supermarkets, serice merchandisers grew 17% in 1983 -- more than three times the growth rate of supermarket sales," Trestman stated. "The proposed acquisition of Mass Merchandisers represents another major step in Focusing McKesson's resources on value-added distribution and related services," stated Harlan. "We are committed to this strategy because distribution is the area which we enjoy our greatest strengths -- strong market positions, computer technology and management skill." Acquisition Follows Spectro Purchase Which Filled Last Geographic Gap For McKesson Drug Business The Mass Merchandiser deal follows a month after McKesson's latest move to expand its drug distribution base. On April 12, the company announced that it had entered into a definitive merger agreement with Spectro, a mid-Atlantic drug whslr., thereby "filling the last major gap in our nationwide drug distribution network" ("The Pink Sheet" April 15, p. 9). Under the terms of the merger, each share of Mass Merchandisers' common stock will be converted into .32 of a share of McKesson common stock and each share of Mass Merchandisers' 25› cumulative non par preferred stock will be converted into one-tenth of a share of McKesson common stock. McKesson also received an option to purchase approximately 18.5% of Mass Merchandisers' outstanding common stock, the release noted. In addition, five corporate directors and one other stockholder who together own roughly 20% of Mass Merchandisers' common stock have agreed not to dispose of their shares through year end, other than in the merger, and to vote in favor of the merger. Napco International, a Minnesota-based distributor of military equipment which holds roughly 9.9% of Mass Merchandisers' stock, has agreed not to dispose of those shares before the end of the year. Through an agreement reached in 1984, Napco is required to vote its sahres in proportion to the vote of Mass Merchandisers' other shareholders on all matters including the merger, the release noted. McKesson also obtained an option to purchase 30,906 shares or 49% of Mass Merchandisers' non par preferred stock held in the Napco Profit Sharing Plan, as well as an agreement that the shares would be voted in favor of the merger. According to McKesson, finalization of the deal is contingent upon various conditions including approval of Mass Merchandisers' shareholders.

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