Bergen Tries to Soothe Investors

After an 80% plunge in its stock price over the past year, Bergen Brunswig Corp. sought to reassure stockholders Tuesday by saying it is making a planned dividend payment and is confident about quickly refinancing $600 million in debt.

At an annual meeting marked by pointed questioning from shareholders, executives at the nation’s third-largest drug distributor outlined cost-cutting plans and indicated they want to sell two troubled companies bought last year during an acquisition spree.

The purchases have increased the Orange-based company’s debt and sharply reduced profits.

“We have to [examine], and are examining, all of our assets,” said Robert E. Martini, Bergen’s chairman. Underperformers are “certainly going to be considered” for sale, he said.

But Wall Street analysts were skeptical about the company’s decision to continue dividend payments and about the prospects of selling its PharMerica Inc. and Stadtlander Drug Co. subsidiaries.

The company’s ability to refinance its debt also may not come cheaply. Two major credit rating agencies have each downgraded Bergen’s debt securities twice in the last three months, reducing numerous issues to junk-bond status.

This week, Bergen disclosed that Hawaii regulators are investigating allegations of fraud at a PharMerica pharmacy in Honolulu. Executives said any wrongdoing began before the company acquired PharMerica. An internal review hasn’t turned up any information that such fraud is widespread within the unit, they said.

Wall Street has been beating up Bergen’s stock. From a high of $28.56 a share last March, the price plummeted to $4.94 last week. It gained a bit, but lost 25 cents Tuesday to close at $5.38 a share on the New York Stock Exchange.

The company’s strategy to deal with its problems, however, is strong, analysts said.

“I’m pulling for them to pare down and focus on their core business,” said Larry Marsh, a senior vice president at Lehman Bros.

Bergen’s troubles have been in the making for some time. After a judge in mid-1998 blocked its $2.4 billion takeover by Cardinal Health Inc., Bergen acquired five companies. But problems cropped up with PharMerica, which supplies drugs to nursing homes, and Stadtlander, which sells immune-system medications to HIV sufferers and transplant patients.

PharMerica has been hit by cuts in government Medicare payments, and Stadtlander has been a money-losing drain on Bergen. Last November, the company fired its chief executive, Donald Roden. Martini is serving as interim chief executive until a replacement can be found.

Martini contends that his company was “hoodwinked” when it bought Stadtlander from Counsel Corp. for $450 million 13 months ago. Bergen has sued Counsel, accusing it of fraudulently inflating the unit’s profits.

Even so, Martini told investors he still believes the unit could be sold because it has “extraordinary people” and is potentially profitable. He wouldn’t say, however, when profits might be achieved.

Martini took more responsibility for PharMerica, which he said is “falling way below expectations.”

He said Bergen believed it had been conservative in its projections of PharMerica profits but had simply misjudged the degree to which the federal government would rein in payments on the Medicare program for the elderly.

Analysts wondered if the troubled acquisitions would draw any decent offers.

“They paid too much for assets that are not yielding what they expected,” said Andrew Speller, a senior analyst at A.G. Edwards.

Shareholders, meantime, demanded to know why the company did not suspend or reduce the regular dividend payment of 7.5 cents a share as a symbol of its dedication to cut costs, if nothing else.

“I’m surprised they’re continuing it,” said John Ransom, director of health-care research at Raymond James. “This is not really a market that rewards paying dividends.”

But Martini said significant numbers of shareholders are long-term investors who have told him they support continued dividend payments.

“There’s no reason to not pay it. We have the cash to do it,” Martini said. Expressing confidence in Bergen’s future, he said: “We believe the shareholders have been hurt enough.”

He said there are no immediate plans for major staffing cutbacks. Bergen Brunswig has 13,000 employees nationwide, about 1,500 in Southern California, including 800 in Orange County. But meeting with reporters after the annual meeting, Martini cautioned: “I can tell you nothing is sacred.”

In previous years, Bergen had run its annual meeting formally, emphasizing corporate presentations and minimizing questions from shareholders. But the 75-minute meeting Tuesday was devoted mainly to town hall-style question-and-answer session with shareholders.

Executives told investors that Bergen expects to refinance $600 million in borrowings that come due in April, part of a total debt load that exceeds $1.5 billion. The pressure on the company’s stock will continue until the company completes a new arrangement with its lenders, Martini acknowledged.

A new $1.3-billion credit line will carry a longer maturity, which, along with the lowered credit ratings, will cost Bergen more, said Neil F. Dimick, the company’s chief financial officer. He estimated that Bergen will pay 1.3 percentage points more than previously for the funds.

However, he said, the interest rate will still be below the prime rate.

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Share-Price Nose Dive

The stock price of the nation’s third-largest drug distributor plummeted over the past year, from a high of $28.56 last March to low of $4.94 on Feb. 11.

March 5, 1999: $28.56

Feb. 11: $4.94

Feb. 16: $5.38

Source: Bloomberg News