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Executive Summary

McKesson's third East Coast whslr. purchase and fourth acquisition overall in the last six months is New York City whslr. S-P Drug. The two firms announced a definitive merger agreement in a joint release on May 21. McKesson is paying approximately $80 mil. in cash for the Brooklyn, N.Y.-based S-P, which had sales of $164 mil. in fiscal 1985 ended April 30 accompanied by net earnings of approximately $4.4 mil.The release notes that S-P is "the leading independent whsle. drug distributor of pharmaceuticals and health and beauty aids to independent drug stores, drug chains and hospitals in the tri-state New York metropolitan area." The acquisition of S-P marks McKesson's re-entry into the metrpolitan New York whsle. drug market. Although originally founded in New York City in 1833, McKesson pulled out of the metropolitan area in 1970 due to unfavorable trends in the drug wholesaling area at that time. Since December, McKesson has acquired three drug whslrs.: Johnson Drug in Tampa, Fla. with approximately $110 mil. annual sales ("The Pink Sheet" Oct. 8, p. 10); Jenkintown, Pa.-based Spectro with sales of $450 mil. in the Mid-Atlantic region ("The Pink Sheet" April 15, p. 9); and S-P. McKesson noted that the Spectro acquisition is "substantially completed." In addition, just two weeks before the S-P merger announcement, McKesson reported the purchase of rack jobber Mass Merchandisers, with annual sales of $330 mil. in 32 states east of the Rockies. The recent round of acquisitions by McKesson follows an 18 year hiatus from purchases in the drug and toiletries area due to a 1967 FTC consent decree, which was terminated in February 1983. In the little more than two years since the repeal of the consent order, McKesson has added approximately $1.25 bil. in sales to the firm's drug and health care group via acquisition. McKesson's latest acquisition, S-P, has shown rapid growth over the past five years. Since 1980, the S-P's revenues have nearly tripled from $62.3 mil. to nearly $165 mil. In FY 1984, S-P sales grew 18% while net earnings climbed approximately 13%. "Over the past four years S-P Drug has reported a compound growth rate of 22% in sales and 45% in net income," McKesson reported. S-P operates out of one distribution center -- its 100,000 sq. ft. facility in Brooklyn. The company said it would use part of the proceeds of its 1983 public offering for an addition to the distribution center. The NYC whslr. gives much of the credit for its recent surge in growth to expanded use of its computerized order entry system. The system now accounts for 65% of all S-P's orders, up from 45% as recent as FY 1983. In its 1984 annual report, S-P noted that system enabled S-P to increase its volume with existing accounts by 20%. S-P also credits its recent growth to the high percentage of its business conducted with independent pharmacies -- about 60% of total sales in FY 1984. "This is somewhat more profitable than other segments of the business and we have a larger share of it than our competitors," the firm said in its FY 1984 annual report. Drug chains comprised about 25% of S-P's sales in 1984, the annual report notes, while sales to hospitals represented about 15% of its business. In FY 1984, S-P's net margin of 2.8% was approximately double the industry average net margin of 1.4%. The whslr.'s net income as a percentage of sales declined modestly to 2.7% in FY 1985. The regional whslr. also carries a very strong balance sheet. At the mid-year mark of fiscal 1985 (Oct. 31, 1984), S-P had a current assets to current liabilities ratio of two-to-one. Under the merger agreement, McKesson is paying $18 per share of S-P's over 4.4 mil. outstanding shares. "The tender offer is expected to be commenced as soon as practicable," the release states. Morgan Stanley is acting as financial advisor to McKesson, while Goldman Sachs is representing S-P, the two firms noted. S-P closed Monday with no change at 15-1/2. McKesson also said that it has "obtained options from certain stockholders of S-P Drug, including certain officers and directors . . . to purchase approximately 2,372,496 shares of common stock" at $18 a share. McKesson noted that the options represent approximately 54% of S-P outstanding shares. S-P President and CEO Robert Smith and Exec VP Howard Smith will continue to run the whsle. business under McKesson. Chart omitted.

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