Bergen Agrees to Merge With Rival Cardinal
In a deal so big that analysts wonder whether the government might stop it, Bergen Brunswig Corp. said Monday that it is merging with Ohio-based rival Cardinal Health Inc. to form the world’s largest pharmaceutical distributor.
The proposed deal, valued at nearly $3 billion, would combine two of the largest companies in the industry into a distribution giant with total revenue of $22 billion.
The company, to be called Cardinal Bergen Health Inc., would be headquartered in Dublin, Ohio, where Cardinal is based. Cardinal would issue about 40 million shares of stock and assume $386 million in Bergen debt.
Bergen shareholders would receive 0.775 share of Cardinal Health for each share of Bergen stock.
Shares of both companies hit new highs in heavy trading on the New York Stock Exchange. Shares of Orange-based Bergen jumped $12.06, or about 40%, to close at $42, and Cardinal advanced $3.25 to $65.56.
The transaction, expected to be completed by early next year, must be approved by regulators and shareholders of both companies.
Analysts said the Federal Trade Commission has yet to evaluate a combination of this magnitude in the industry. The combined company would control about a third of the market for drugs and related products sold through U.S. wholesalers, and a quarter of overall drug sales.
“The big question is, will regulatory authorities approve it,” said Jeffrey Kraws, an analyst with Everen Securities in Chicago.
The merger would tilt the industry’s playing field in favor of the new company and likely “make it much more difficult for competitors to enter the business,” he said. The next-largest competitor would be San Francisco-based McKesson Corp., which is expected to post about $18 billion in revenue for the fiscal year ending in March.
Bergen Brunswig Chairman Robert E. Martini said he doesn’t believe antitrust questions will present an obstacle to the deal. “Both parties have studied that very diligently, used expert analysts and have spoken to some of our larger customers,” he said. “We’ve gotten an overall favorable reaction [from customers], and we intend to cooperate with the FTC.”
The combination is expected to result in annual savings of at least $100 million from job reductions and consolidations of distribution outlets, among other things.
A handful of executives from both companies have been promised places in the new company. However, company officials refused to say how many positions might be cut in the combined work force of 16,000.
If the deal goes through, Orange County will lose its fourth-largest publicly traded company.
Bergen previously had agreed to merge with generic drug maker Ivax Corp., but the companies called off the deal in March. Robert Walter, Cardinal’s chairman and chief executive, said that when the Ivax deal collapsed, he finally “got the guts” to call Bergen to discuss a possible deal.
Walter would become chief executive of the combined company and Martini would be chairman.
Donald R. Roden, Bergen’s chief executive, and John C. Kane, Cardinal’s president and chief operating officer, would serve as co-presidents and chief operating officers of the new company. Cardinal’s board of directors would also be expanded to 14 members to include four directors from Bergen, including Martini and Roden.
The companies share similarities, with both having revenue of about $11 billion and distributing pharmaceutical and medical products to pharmacies and health systems across the country.
However, the deal would leave Cardinal firmly in the driver’s seat.
Lawrence Marsh, a Salomon Bros. analyst, attributed Cardinal’s negotiating strength to the overall market value of its outstanding stock--roughly $6.8 billion, compared with $1.5 billion for Bergen.
Cardinal has taken a step to protect itself if the merger falls through. It received an option to buy as much as 19.9% of Bergen’s common shares should the deal go awry.
