U.S. healthcare services company McKesson Corp. snapped up 470 Rexall Health stores for $3-billion on Wednesday, adding retail operations in Canada to its burgeoning pharmaceutical portfolio.
McKesson already supplies 1,900 pharmacies in Canada, but this is the first time the company will be operating a chain of stores, going head-to-head against Shoppers Drug Mart, which has 1,310 locations.
McKesson also operates distribution centers that ship pharmaceuticals to stores, hospitals, clinics and nursing homes. McKesson bought the chain from the privately owned Katz Group, whose founder and chairman, Daryl Katz, is also owner and governor of the Edmonton Oilers. The two already know each other. McKesson spent $919 million in 2012 to buy other pharmaceutical marketing and purchasing services from Katz Group.
“With today’s announcement, McKesson will bring together the strengths and expertise of our diverse portfolio to address challenges and opportunities in delivering the very best patient care,” said McKesson CEO and chairman John H. Hammergren in a press release.
Rexall employs 8,600 people. The combined operation will employ 13,000 people here.
The deal is expected to close later this year, subject to review under the Investment Canada Act and by the Competition Bureau of Canada.
The deal is the Bridgewater, New Jersey-based’s drug distributor’s latest in a series of efforts to expand globally and deepen its offerings. In 2014, it announced it bought 10 drugstores from Loblaw Cos.
Last year it bought a drug distribution business in Belgium. Its biggest recent deal was a $1.2 billion (U.S.) acquisition of two oncology businesses, Vantage Oncology LLC and Biologics Inc., which included 50 cancer treatment centers in 13 states.
“The acquisition is yet another example of McKesson’s ability to deploy capital to grow earnings and drive return on invested capital,” Steve Halper, an analyst at FBR, said in a research note Wednesday, referring to the latest deal. “Given its healthy free cash flow, these are the exact moves that MCK should be pursuing.”
McKesson gained 1.3 percent to close at $158.59 in New York trading. The shares had fallen 21 percent this year through Tuesday’s close.
Industry experts had predicted that Rexall would be the subject of a takeover, especially after Loblaw Companies Ltd. bought Shoppers for $12.4 billion in 2013. The bets were on a grocer or competing drugstore chain being the suitor.
The announcement in May that Jurgen Schreiber, president and CEO of Shoppers Drug mart from 2007 to 2011, had been appointed CEO of Rexall Health added to speculation of a sale.
Schreiber was regarded as a great choice if Rexall was looking to improve its beauty offer and drive sales in categories outside of pharmaceuticals, making it a more attractive asset.
Katz is a private company, so Rexall’s financial results are not public.
“We do not see substantial changes to the Canadian pharmacy retail landscape as a result of this acquisition,” National Bank Financial analyst Vishal Shreedhar wrote in a note to investors following the sale on Wednesday.
Management consultant Mark Satov said it’s a smart move for McKesson, and it makes sense for Katz, allowing him to focus on other investments, which include real estate and sports and entertainment.
Satov said the move will give McKesson more muscle when it comes to negotiating business with institutional customers like health plan insurers operating nationally.
“There’s no issue for Canadian consumers. Drug prices are controlled and regulated,” said Satov.
Not everyone agrees.
“It’s not which company is doing the growing, it’s the continued growth of transnational power and concentration that is the problem,” said Maude Barlow, national chairperson of the Council of Canadians.
She said global companies make decisions about employment from headquarters far removed from the cities where the job losses take place.
“The best managers are the ones that breathe the same air and drink the same water as we do,” said Barlow.
Many U.S. companies have sued the Canadian government under the North American Free Trade Agreement (NAFTA) over laws or policies that compromise their ability to operate, Barlow points out.
Canada has paid American corporations more than $200 million in the seven cases it has lost under NAFTA challenges, according Barlow.
“McKesson isn’t just a drug store chain. It is a big pharmaceutical retailer that supplies drugs at retail prices. It also provides information technology, medical supplies etc.,” Barlow added. “What if they don’t like a new Canadian law bringing in pharmacare?”
– With files from Toronto Star news services