Katz sells portion of pharmacy assets
$920M deal doesn’t include Rexall chain
Oilers owner Daryl Katz has sold a big chunk of his privately owned pharmacy business to U.S. giant Mckesson Corp. for $920 million.
In a deal announced late Monday, Mckesson said it signed a purchase agreement for Drug Trading Company Limited, the independent banner business of the Katz Group Canada Inc., and Medicine Shoppe Canada Inc., the drugstore chain’s franchise network.
“This transaction unlocks significant value through the sale of two outstanding but non-core assets,” Katz said in a release. “We will intensify our focus on our corporately owned Rexall and Rexall / pharma Plus store network to accelerate the growth of our Rexall brand and the value proposition that it represents to our patients and customers.
“We will also accelerate the growth of our related real estate interests.”
The new cash will not have an effect on the downtown arena project, said Bob Black, executive vicepresident of the Katz Group’s sports and entertainment division.
“The arena funding model was designed to balance the economic risks and rewards of developing a major catalyst project in downtown Edmonton that the city will own. Today’s announcement changes nothing in that regard.”
San Francisco-based Mckesson, the world’s largest health-care service and technology firm with annual revenues of about $120 billion US, is the 15th largest company in the Fortune 500.
CEO John Hammergren told ana- lysts on a company conference call he expects the deal with Katz Group to close in the first half of 2012. “Katz Group is a highly valued Mckesson customer and we are excited about this transaction,” he said.
“This transaction is of strategic value to us and financially it will generate a nice return in excess of our hurdle rates. In addition to the acquisition, we will also continue to serve as the primary pharmaceutical distributor to the (400) Katz corporate-owned stores. We believe this transaction is a good fit with our long-term objectives in Canada.”
Mckesson plans to pay for the acquisition in cash. The company has a current cash balance of about $4.2 billion US.
Katz Group’s Rexall stores are not part of the deal. Katz plans to expand the Rexall chain by incorporating the 18-store Dell Pharmacies chain in southern Ontario. In a separate deal, Katz Group announced the purchase of the Dell chain Monday for $70 million (Cdn).
Katz’s Drug Trading firm is the marketing and purchasing arm for a network of more than 850 independently owned pharmacies across Canada, the majority of which operate under the I.D.A. and Guardian brands.
Mckesson will acquire Medicine Shoppe Canada, which operates the franchise business of providing services to more than 160 independent pharmacies.
Mckesson has been the primary pharmaceutical distributor to the Drug Trading and Medicine Shoppe Canada independent pharmacies for many years.
Katz Group will continue to supply Drug Trading’s Guardian and I.D.A. banners and Medicine Shoppe Canada franchisees with Rexall branded over-the-counter health and beauty products.
Monday’s deal between Katz Group and Mckesson didn’t come as a complete surprise to industry observers.
There was speculation a year ago that Katz Group was in negotiations to sell its store network to Quebec’s Jean Coutu Group, another major pharmacy operator.
“The (surprise) wrinkle in this deal is that it doesn’t include the corporate stores,” said one industry analyst, who spoke on condition of anonymity.
“There’s a bunch of those left, but they have a long-term distribution deal with Mckesson. So I have no idea whether Katz intends to sell those in a separate deal, but that’s possible.
“Maybe the way to maximize the price for his company was to sell this in two separate deals.
“But anybody who buys those (corporate) stores has to be distributed to by Mckesson for the next few years.”
The analyst said the $920-million price tag is roughly in line with his estimate of the value of the assets being sold. Katz Group’s remaining assets are likely worth slightly less than that, he said.
“I wouldn’t say this is an outrageous price, and I also wouldn’t say this is a cheap price.
“From my view, it’s probably very close to the average.”
As for Katz’s personal financial position, the analyst said the deal should significantly bolster the billionaire’s wealth.
“Oh, yeah, he’s way in the money. He’s deep. He could build an arena by himself. And you know if it was a really good idea to spend $450 million on an arena, if there was a really great return on it, he would do it, right? That tells you everything you need to know about arena math.
“He’s a pretty sharp businessman, and he’s made a lot of money off this set of assets.”