Health Software Giant McKesson Still Hunting Celesio

NEW YORK (TheStreet) -- Those who thought Obamacare would hammer health care stocks need to eat their words.

Many companies in the sector are on fire. McKesson (MCK), a leader in drug wholesaling and health care IT, is up 65% over the last year. It has decided to invest that money in international expansion.

While its tender offer for Celesio, which might be considered its German counterpart, failed to get the necessary 75% approval yesterday, the deal is not completely dead.

McKesson had raised its offer to 23.50 euros per share (about $32.12) and bought convertible bonds from Elliott International, a major stakeholder, under the assumption the sweetened offer would be accepted. Celesio has a market cap of 3.9 billion euros (about $5.3 billion). McKesson's market cap is $38.9 billion.

Celesio fell by more than a euro per share after the tender's failure was announced, but is trading up today.  If the shares decline, that may put more pressure on recalcitrant shareholders to take the higher offer. The latest offer is a 43% premium on Celesio's price before McKesson's first offer was announced. 

The larger question is why McKesson moved for Celesio at all. There are some Celesio operations, like the Lloyd's pharmacy chain in England, that seem completely outside McKesson's niche. But the rest of the company is compatible with McKesson.

That compatibility may be the big Obamacare story here. Germany's health care system, with mandatory public and private insurance, is similar to what many envision evolving under Obamacare.

With Western health systems becoming more similar, international consolidation starts to make more sense. In addition to its U.S. distribution system, McKesson is a leader in the health IT market, which was worth $40.4 billion in 2012 and got a $19.2 billion boost from the 2009 American Recovery and Reinvestment Act, which included funds to help clinics and hospitals buy health IT systems.

Unlike the situation in other areas of computing, health industry specialists like McKesson have managed to fight off efforts by mainstream computing companies like Microsoft (MSFT) and Hewlett-Packard (HPQ) to grab a share of the market. Health IT is a complicated sale, and customers don't tend to switch vendors often.

In distribution, McKesson and its two main rivals, AmerisourceBergen (ABC) and Cardinal Health (CAH), control 95% of the U.S. market. International expansion gives it a leg up on those rivals.

U.S. market dominance no longer generates much organic growth at McKesson, whose fiscal year ends in March. It had $65 billion in sales for the first half of this fiscal year, and sales of $122 billion for the full year ending March 31. It is due to announce results for the December quarter on January 30.

Despite its relative stability, McKesson gets significant love from analysts. Out of 16 following the stock, 12 have it as a buy.  Our own Jim Cramer calls it "unbelievable" in a good way. Estimates for the December quarter are for earnings of $1.86 per share, against the $1.71 per share it reported for September and the $1.24 per share it earned in the December quarter a year ago.

Even if it's forced to give up on acquiring Celesio, McKesson could still do a joint-venture with the German company, CEO John H. Hammergren told the JP Morgan Health Care Conference yesterday. A joint venture could help it bring operations into Europe, and make its system more compatible with that of Celesio, smoothing the way to a future takeover. It might also help McKesson bring its software systems to European customers.

Regardless of what happens, McKesson is not giving up on its international ambitions.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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