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Bergen Brunswig Tests Waters for Acquisition of FoxMeyer

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TIMES STAFF WRITER

Bergen Brunswig Corp. said Thursday that it is exploring a possible acquisition of FoxMeyer Corp., one of its biggest competitors in the drug-distribution business, in a move that would boost Bergen’s sales by more than half and strengthen its presence in the Midwest.

By acquiring Dallas-based FoxMeyer, the nation’s third-largest pharmaceutical wholesaler, Bergen, the second-largest, would boost its pharmaceutical sales from $3.9 billion to $6.3 billion annually. The combination would make Bergen nearly the size of San Francisco-based McKesson Corp., the nation’s largest drug wholesaler.

Analysts cautioned, however, that a merger of the two large distributors would likely receive careful scrutiny by federal antitrust regulators.

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Bergen officials said the company earlier this week sent a letter to National Intergroup, a Pittsburgh firm that owns FoxMeyer, expressing interest in buying the Dallas firm. The letter was sent in response to a request from National Intergroup’s investment bankers.

Bergen officials stressed that the letter was not an offer to buy. Robert E. Martini, Bergen’s president and chief executive, said his company hopes “to engage in serious discussions with FoxMeyer, and to make a thorough due diligence investigation so that we can make a meaningful offer.” He said there is “no assurance” that an offer would be made.

Similarly, National Intergroup said it has not decided whether to sell FoxMeyer, but is testing the waters to see what price it might fetch.

Stan Ellspermann, National Intergroup’s vice president of administration, said the company announced in August that it would entertain offers. “Bergen is one of several companies who have expressed an interest and we will see what develops,” he said.

FoxMeyer distributes pharmaceutical products in about 30 states, concentrating in the Midwest, a region in which Bergen is comparatively weak, said Bob King, FoxMeyer’s chief executive.

Since 1988, King said, FoxMeyer has reorganized and sold off its non-pharmaceutical ventures--including hospital medical supply, computer software, international trading and furniture-importing businesses--in an effort to increase profitability.

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“We have improved operating margins significantly and our sales are continuing to grow at 15% to 16% a year,” King said. FoxMeyer reported a $38.1-million operating profit on revenue of $2.4 billion for its latest fiscal year.

Bergen’s pharmaceutical business posted operating earnings of $112.5 million on sales of $3.9 billion for its fiscal year ended Aug. 31.

A proxy battle at National Intergroup in July resulted in a dissident shareholder, Centaur Partners, gaining a minority position on the company’s board of directors.

Centaur Partners has pressured National Intergroup to sell FoxMeyer, virtually National Intergroup’s only asset. Centaur has estimated that the sale of FoxMeyer would raise between $475 million and $525 million.

Mark Felder, vice president of research for Legg Mason Inc., a Baltimore investment bank, said FoxMeyer “could be a good strategic acquisition” for Bergen depending on the selling price. Bergen, he said, has a strong financial sheet and plenty of available cash.

“I think Bergen was a natural bidder,” he added.

Some analysts said a Bergen-FoxMeyer merger could raise antitrust concerns at the Federal Trade Commission. The industry went through a period of consolidation several years ago that left the top four U.S. drug distributors with 60% of domestic sales.

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McKesson Corp.’s drug division posted sales of $6.4 billion for its fiscal year ended March 31. Two years ago, McKesson dropped its plans to acquire Alco Health Services Corp., the nation’s No. 4 drug wholesaler, after the federal government threatened to block the transaction.

Felder said the FTC might not prohibit a Bergen-FoxMeyer merger outright, but could require the sale of operations in certain cities where the merged entity would have too large a market share. “The antitrust problem would probably be looked at market by market,” he said.

Analysts noted that Bergen and National Intergroup officials have had prior dealings. In 1985, before National Intergroup acquired FoxMeyer, the two companies considered merging, primarily so that Bergen could reap a tax benefit. The two companies were unable to reach an agreement.

Besides its drug distribution business, Bergen is also the nation’s largest distributor of prerecorded videocassettes. In all, the company posted earnings of $66 million on revenue of $4.4 billion in its last fiscal year.

National Intergroup is a financially troubled company that once owned a number of metals operations, including half of National Steel Corp. It recently sold most of its metals investments in order to focus on the pharmaceutical business. It acquired FoxMeyer in 1986 for $400 million, also assuming about $150 million in debt.

For the six months ended Sept. 30, National Intergroup lost $282.7 million. Much of the loss involved costs associated with its restructuring program and the proxy contest.

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