Orange-based Bergen Brunswig Corp. and pending acquirer AmeriSource Health Corp. are readying answers to questions posed by federal regulators and hope to present their proposed combination to shareholders this summer.
Bergen spokeswoman Donna Dolan said she wasn’t able to offer specifics but indicated that the Federal Trade Commission had inquired about market size and the market share of a combined AmeriSource-Bergen Corp. The drug distributors’ responses should be finished and sent to Washington, D.C., by month’s end, according to Dolan.
From there, the commission has 30 days to make a decision after receiving the materials. If regulators sign off on AmeriSource’s buy of Bergen, Dolan said, stockholders could vote on the deal in early to mid-August. A deal is expected to close in mid- to late August, she said.
An FTC spokesman confirmed that the agency requested more information from Bergen and AmeriSource, but declined further comment.
In 1998, federal regulators nixed Bergen’s proposed buy of Dublin, Ohio-based Cardinal Health Inc. and a separate proposed deal between AmeriSource and San Francisco-based McKesson HBOC Inc. At that time, regulators feared the combinations would slice the wholesale drug distribution industry’s competitive field in half, leaving just two big players.
This time around analysts are giving the AmeriSource-Bergen deal sporting odds.
“This one has a pretty good chance, because you’re going from a four-player to a three-player market,” said Linda Varoli, an analyst with New York-based Merger Insight, which tracks large mergers. Federal regulators, Varoli said, are “a little lenient” on deals that don’t cause extreme industry consolidation.
“They don’t like four players to two,” she said.
Andrew Speller, an analyst who follows Bergen and AmeriSource for A.G. Edwards Inc. in St. Louis, said no organized opposition has emerged to the AmeriSource-Bergen proposal. Three years ago, customer groups, large drugstore chains and hospital purchasing organizations all lined up against the Bergen-Cardinal deal.
Even though analysts give the AmeriSource-Bergen combination a decent chance of going through, Merger Insight’s Varoli said regulators’ request for more details suggest “there are still some obvious issues.”
In a Securities and Exchange Commission filing related to the deal, Bergen said one factor that led its board to pursue the acquisition was advice from lawyers that there was a good chance antitrust authorities would permit the deal.
Also, the company said, “Bergen customers had communicated that they would be in favor of a combination involving Bergen and AmeriSource in the belief that such a combined entity would be a stronger alternative source of products and services in the industry.”
Bergen and AmeriSource may benefit from political and philosophical changes at the FTC, according to Larry Marsh, an analyst with Lehman Brothers Holdings Inc. in New York.
“Our odds of success (for the merger) creep up from 60-40 to 65-35, based on last Friday’s FTC confirmation of Timothy Muris and some additional constructive customer feedback,” Marsh wrote in a research note.
Bush administration appointee Muris, who also worked for the commission during the Reagan administration, is considered friendlier to large mergers than his predecessor, Clinton appointee Robert Pitofsky.
In their filing, the companies said AmeriSource Chief Executive R. David Yost and Robert Martini, Bergen’s interim chief executive and chairman, began talking about a possible stock-swap deal in February 2000. The two companies undertook due diligence reviews and “the boards of directors of both companies considered the strategic rationale of a proposed combination and regulatory considerations,” the filing said.
Yost and Martini resumed discussions in July 2000 “and decided to attempt to structure and negotiate the terms and conditions of such a transaction,” according to the filing.
Lawyers for both companies drew up a merger agreement, but the executives ended up scratching the proposed deal last September.
Then the industry landscape shifted. Cardinal said it planned to buy smaller rival Bindley Western. In December, Yost and Martini again resumed their talks about joining forces. The companies’ discussions intensified in January, touching on, among other things, management of the combined company and required regulatory approvals.
Two months later, Valley Forge, Pa.-based AmeriSource and Bergen jointly announced that AmeriSource planned to buy Bergen for about $4.5 billion in stock and debt assumption.
Bergen contends that its stockholders stand to benefit from a business combination. In the merger filing, Bergen noted that “the per-share consideration to be received by Bergen shareholders in the merger represents a premium of approximately 12% based on the price of the Bergen common stock and AmeriSource common stock on the last trading day prior to the announcement of the signing of the merger agreement.”
Bergen, with $23 million in annual sales, is nearly double AmeriSource’s size. But as of last week, AmeriSource had a larger market capitalization: more than $3 billion vs. Bergen’s $2.8 billion. Bergen’s lower valuation is in part due to serious financial woes in 1999 and 2000 stemming from two acquisitions that proved problematic.
If the AmeriSource-Bergen deal goes through, Speller of A.G. Edwards estimates that the three largest wholesale drug distributors each would control around 27% of the market.
“You have to be very large in order to be profitable,” he said.
The combined AmeriSource-Bergen would be based in Pennsylvania, with the Orange County offices retained as a West Coast management center. Martini is scheduled to become non-executive chairman of the new company, while Yost is set to be president and chief executive of the combined entity. n
