Bergen Brunswig and National Intergroup Call Off Plan to Merge
The merger painstakingly put together by Bergen Brunswig of Los Angeles and Pittsburgh-based National Intergroup fell apart Wednesday when Bergen decided that it didn’t want to own a steel company after all--especially one that is in worse shape than it thought.
The two companies, considered unlikely partners when they divulged their plans last October, blamed the deal’s collapse on a sharp deterioration of the steel industry in the first quarter and last week’s downgrading of National’s reported 1984 profit.
In announcing their abandonment of the merger just days before it was to take effect, National disclosed that it will report a first-quarter loss of about $1 a share, or $20 million. Earlier, it had restated 1984 earnings to reflect “unauthorized” transactions by its aluminum unit, slashing net income by 74%, or $38.9 million.
“That $1-a-share (loss) is quite a long way from what we expected just a short time ago,” said Emil P. Martini Jr., chairman of Bergen, a fast-growing drug-distribution firm. “And the restatement of earnings significantly changed what 1984 looked like.”
Other Bidders Expected
Analysts said Bergen had exercised a right of either party to pull out of the deal in the event of a “material adverse change” in the other’s condition. Referring to the reduction of 1984 profits, James Waggoner, an analyst with Bear, Stearns & Co., said, “$38.9 million is material.”
The turn of events led to immediate speculation about who will try next to take over National, formerly National Steel Corp. The firm has been openly seeking partners to diversify and lessen its dependence on the troubled steel industry, and it said Wednesday that it will continue to do so.
Its 1983 plan to sell the steel unit to U.S. Steel was killed by the Justice Department, though the firm subsequently sold half of the steel subsidiary to Japan’s No. 2 steelmaker, Nippon Kokan.
“National will go on and possibly merge with someone else,” said steel analyst Peter Marcus of Paine Webber in New York.
Leucadia National of New York, a major shareholder that waged an unsuccessful proxy fight against the merger, at one time said it would try to take control of National if the merger failed. Leucadia officials couldn’t be reached Wednesday, and other institutional opponents of the merger declined to comment on the deal’s collapse.
Stock Prices Drop
Shares in both companies declined in Wall Street trading Wednesday, with Bergen Brunswig stock closing at $26, down 87.5 cents, on the American Stock Exchange and National Intergroup falling to $24.75, off $1.875, on the New York Stock Exchange.
Waggoner said that, among other things, the restated 1984 earnings and unexpectedly poor first-quarter results reduced the amount of cash that National would have brought to the merger--a key part of the deal from Bergen’s standpoint.
Bergen’s rationale for acquiring National was access to the company’s approximately $300 million in cash and another $300 million in tax credits. The credits would have shielded Bergen’s robust profits, and the cash would have let Bergen accelerate its growth by acquiring other companies in the health-care field.
Martini, reached Wednesday at his Pittsburgh hotel room, said that he had become increasingly concerned about National’s condition and that “I came to Pittsburgh to talk about it.”
He and National Chairman Howard M. Love agreed to call off the deal after a meeting Tuesday night at National’s headquarters in downtown Pittsburgh, he said.
Martini said Bergen didn’t feel that it had been misled about National’s condition and called the meeting “absolutely cordial.” He added that he considers the steel problem an industrywide one.
“We just had too high a discomfort level with steel, basically,” he said.
But the problems with the aluminum unit were “the straw that broke the camel’s back,” analyst Waggoner said. “Emil knew what he was getting into with steel. What everyone was surprised at was the extent of the aluminum problem.”
National isn’t saying much about the difficulties at its National Aluminum subsidiary except that officials there made unauthorized commitments to buy “substantial” deliveries of aluminum ingot at prices that have since been undercut in the market.
While an internal investigation continues, National was forced to make accounting changes that reduced its 1984 net income to a nominal $13.7 million from the previously reported $52.6 million.
National also holds 82% of what is now First Nationwide Financial Corp., the San Francisco-based parent of First Nationwide Savings. Bergen distributes drugs, medical and surgical supplies and videocassettes.
The cancellation of the merger is a big setback for National’s Love, who prevailed in the long proxy fight and has won praise for his efforts to turn National into a less cyclical conglomerate. Despite high anti-takeover barriers, National could face a hostile takeover by liquidation-minded investors if it can’t find a more congenial suitor.
Analysts say Bergen, by contrast, will merely face slightly slower growth than would have been possible with National’s cash.
“They’ll keep growing, but maybe not quite as fast as they would have,” said analyst Steven Reid of Bateman Eichler, Hill Richards in Los Angeles. “And the merger would have added an element of cyclicality. From a market perspective, this is good news.”
