Filed by: Bergen Brunswig Corporation. This
Communication is filed pursuant to Rule 425
under The Securities Act of 1933, as amended,
and deemed filed pursuant to Rule 14a-12 of
the Securities Exchange Act of 1934.
Subject Company: Bergen Brunswig Corporation
Commission File Number: 1-5110
FORWARD-LOOKING STATEMENTS
The following communications contain certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are based on management's
current expectations and are subject to uncertainty and changes in
circumstances. Actual results may vary materially from the expectations
contained in the forward-looking statements. The forward-looking statements
herein include statements addressing future financial and operating results of
AmeriSource and Bergen Brunswig and the timing, benefits and other aspects of
the proposed merger.
The following factors, among others, could cause actual results to differ
materially from those described in the forward-looking statements: inability to
obtain, or meet conditions imposed for, governmental approvals for the
transaction; failure of the stockholders of AmeriSource and Bergen Brunswig to
approve the merger; the risk that the businesses of AmeriSource and Bergen
Brunswig will not be integrated successfully; failure to obtain and retain
expected synergies; and other economic, business, competitive and/or regulatory
factors affecting the businesses of AmeriSource and Bergen Brunswig generally.
More detailed information about these factors is set forth in AmeriSource's and
Bergen Brunswig's filings with the Securities and Exchange Commission, including
each of their Annual Reports on Form 10-K for fiscal 2000 and their most recent
quarterly reports on Form 10-Q. AmeriSource and Bergen Brunswig are under no
obligation to (and expressly disclaim any such obligation to) update or alter
their forward-looking statements whether as a result of new information, future
events or otherwise.
ADDITIONAL INFORMATION
In connection with their proposed merger, AmeriSource and Bergen Brunswig will
file a joint proxy statement/prospectus with the Securities and Exchange
Commission. INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE JOINT PROXY
STATEMENT/PROSPECTUS WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAIN
IMPORTANT INFORMATION. Investors and security holders may obtain a free copy of
the joint proxy statement/prospectus (when available) and other documents filed
by AmeriSource and Bergen Brunswig at the Securities and Exchange Commission's
web site at www.sec.gov. The joint proxy statement/prospectus and such other
documents may also be obtained for free from AmeriSource or from Bergen Brunswig
by directing such request to AmeriSource Health Corporation, General Counsel,
1300 Morris Drive, Suite 100, Chesterbrook, Pennsylvania 19087-5594, Telephone:
(610) 727-7000; or to Bergen Brunswig Corporation, Attention: Corporate
Secretary, 4000 Metropolitan Drive, Orange, California 92868-3510, Telephone:
(714) 385-4000.
PARTICIPANTS IN SOLICITATION
AmeriSource and Bergen Brunswig and their respective directors, executive
officers and other members of their management and employees may be deemed to be
participants in the solicitation of proxies from their respective stockholders
in connection with the proposed merger. Information concerning AmeriSource's
participants in the solicitation is set forth in AmeriSource's Current Report on
Form 8-K filed with the Securities and Exchange Commission on March 19, 2001,
and information concerning Bergen Brunswig's participants in the solicitation is
set forth in Bergen Brunswig's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 19, 2001.
********
MORGEN WALKE ASSOCIATES
March 19, 2001
9:30 A.M. CST
Moderator Ladies and gentlemen, thank you for standing by. Welcome to the
AmeriSource-Bergen conference call. At this time, all
participants are in a listen only mode. Later we will conduct a
question and answer session. As a reminder, this conference is
being recorded.
I would now like to turn the conference over to our first
speaker, Mr. Jeffery Zack, with Morgen Walke Associates. Please
go ahead, sir.
J. Zack Good morning, everyone. Thank you for joining us. We apologize
for the delay in getting started this morning. There has been an
overwhelming response to this conference call and we wanted to
allow enough time to let as many people on as we possibly can.
Today we are here to discuss the combination of AmeriSource
Health Corporation and Bergen Brunswig Corporation, announced
earlier this morning. If you have not yet received a copy of the
press release, please call Morgen Walke at (212) 850-5698.
With us on the call this morning are Robert E. Martini, Chairman
and Chief Executive Officer of Bergen-Brunswig, David Yost,
Chairman and Chief Executive Officer of AmeriSource. Also joining
us are Kurt Hilzinger, President and Chief Operating Officer of
AmeriSource and Neil Dimick, Bergen's Chief Financial Officer.
After management has concluded their formal remarks, a question
and answer period will follow.
Before we get started, I would like to remind everyone that the
conference call will contain certain forward looking statements
within the meaning of Section 27A of The Securities Act of 1933,
and Section 21E of The Securities Exchange Act of 1934. These
statements are based on management's current expectations and are
subject to uncertainties and changes in circumstances.
The forward looking statement herein include statements
addressing future financial and operating results of AmeriSource
and Bergen Brunswig, and the timing, benefits and other aspects
of the proposed combination. More detailed information about
these factors, which could cause actual results to differ
materially from those described in the statements, are set forth
in
AmeriSource's and Bergen's filings with the SEC. The companies
are under no obligation to update or alter their forward-looking
statements.
So with these formalities out of the way, I'd like to turn the
call over to Bob Martini.
R. Martini Good morning. We are very excited about this morning's
announcement and our plans to combine AmeriSource and Bergen
Brunswig to create a new $35 billion health care services
company. This is a well thought out combination, which we've
been working on for some time. There are so many reasons why
this is a strategically compelling transaction. We are confident
that bringing our two great companies together will allow us to
deliver enhanced benefits for shareowners, customers, suppliers
and employees.
We will be creating a new company that will be one of the 50
largest in the United States in terms of revenue. I am
comfortable that this is such a good fit because I know that we
both have corporate cultures that are recognized for their focus
on quality, efficiency and customer satisfaction. As independent
companies, we each have tremendous strengths. We are
very excited about the opportunity that this combination brings
to generate enhanced growth, achieve substantial synergies and
produce benefits for suppliers and customers of both
organizations.
The organization we will create will combine the best of both
AmeriSource and Bergen. That's reflected in our new name,
AmeriSource-Bergen Corporation, and our new structure. There will
be equal representation on the board of directors. There will be
a total of ten members on the board, with eight independent
directors, including three from each company. Also,
AmeriSource-Bergen will nominate two additional unaffiliated
directors.
I will now turn the call over to Dave Yost, the Chairman and CEO
of AmeriSource. I have known Dave for many years. As many of you
know, we have had a CEO search underway at Bergen, and Dave
embodies the qualities we've been looking for: a proven track
record, hands-on operating experience, strategic vision,
leadership and has high visibility in the investment community. I
am looking forward to working with Dave. He will become the CEO
and President of the new company. David?
D. Yost Thank you very much, Bob. Good morning, everyone. On behalf of
everyone at AmeriSource, I'd like to convey our excitement about
this transaction.
Bob touched on a few of the strategic, financial, operating and
cultural reasons for this transaction. As he said, they are
compelling. First, it is important to note that this combination
is not about being big. It is about being the best. We will
take the best from each company. We have chosen to create an
entirely new company, AmeriSource-Bergen, to reflect our best of
the best approach.
Over the next several months we will develop the operating
policies, organizational structure and the like, that best suits
our new enterprise. But make no mistake; we are prepared to make
the tough decisions to successfully execute this transaction.
These are businesses that we know very well. AmeriSource and
Bergen are a great geographic and strategic fit. Together we
will be the absolute finest wholesale drug operation in the US.
While we both operate nationally, AmeriSource has a stronger
presence in the eastern United States, and Bergen's distribution
business has a stronger presence in the west. AmeriSource's
strength is in the acute care business, independent retail
pharmacy and regional chains. Bergen is strong in the long-term
care business, also in the independent and regional retail
chains, as well as national chains. We feel that for America's
long-term care operations and its worker's compensation business,
as well as ASD's specialty healthcare offerings in oncology,
vaccines and biotech products, currently a part of Bergen's
portfolio of businesses, will enhance AmeriSource-Bergen's
position in health care.
We believe we will be able to serve all market segments better.
Our businesses match up in other ways. AmeriSource's American
Health Packaging unit will provide added benefits to Bergen's
PharMerica and drug distribution operations. Throughout all of
their operations, both companies share a common culture of
providing outstanding service and making customer satisfaction
paramount.
The new management team also reflects our combined capabilities.
The senior management team will include Kurt Hilzinger, the
President and
Chief Operating Officer of AmeriSource, who will become Executive
Vice President and Chief Operating Officer of the combined
company; Neil Dimick, Bergen's current Chief Financial Officer,
will become Executive Vice President and Chief Financial Officer
of the new company.
The new company's structure also includes an executive management
committee, which I will head. The AmeriSource-Bergen committee
will include Kurt Hilzinger and Neil Dimick, as well as three
senior vice presidents who will report to Kurt. Brent Martini,
currently President of the drug distribution at Bergen, will
become President of AmeriSource-Bergen Drug Company. Charles
Carpenter, Chuck Carpenter, now the President of PharMerica, will
remain in the same position at the new company. And Steve
Collis, President of Bergen's ASD Specialty Healthcare, Inc.,
will continue to head the unit under AmeriSource-Bergen.
AmeriSource-Bergen will be headquartered in Valley Forge. There
will be an East Coast operation center there, as well as a West
Coast operation center in Orange, California. But again let me
emphasize, make no mistake; we are prepared to make the tough
decisions to successfully execute this transaction.
I know many of you are wondering about FTC review. We have made
a very thorough and lengthy study of the antitrust issues with
our legal, economic and financial antitrust experts. And based
on that study, we do not anticipate that the FTC will ultimately
challenge this merger. We believe that for several reasons.
This transaction does not reduce competition, nor does it violate
antitrust laws. In fact, we believe very strongly that the
combination of AmeriSource and Bergen will enhance competition in
drug distribution. The merger will not only enhance the
competitive position and efficiency of AmeriSource and Bergen, it
will also improve competition in drug distribution generally.
That is because the combined company will be in a position to
achieve the economies of scale that are greater than either of us
could achieve on our own. It is worth noting that the situation
today bears little resemblance to that of 1997. There is every
reason to believe that our transaction will ensure that drug
distribution remains dynamic and intensely competitive.
We also expect the transaction to pass with the FTC because
distribution is about the only major area of health care where
costs are going down. Both AmeriSource and Bergen have met that
challenge consistently and steadily over time. This combination
will continue that trend.
And finally, this transaction will allow us to enhance and expand
the programs and services we offer our customers. Many of our
customers have encouraged us to move forward with this
transaction. Customer focus and service orientation was one of
the early issues that Bob and I discussed in bringing these two
fine companies together. We share a vision that this new
corporate entity will be the standard for service in the industry
and will enhance and expand our already strong service offering.
In short, we are confident that the combined company will be an
efficient, health care supply chain management company well
positioned to compete and to grow.
With that, I'd like to turn the call over to Kurt Hilzinger,
President and Chief Operating
Officer of AmeriSource, who will be the Chief Operating Officer
of the new enterprise, to further detail the benefits of this
transaction and the synergies that we anticipate to achieve.
K. Hilzinger Thank you, Dave. Good morning, everyone. As noted in the press
release, we expect the combined company will achieve more than
$125 million in annual operating savings by the end of the third
year after the transaction closes. To date, we have done a
significant amount of work to identify the synergies of this
transaction.
Our approach to the integration is straightforward: take the best
from each company. This will be achieved by one, fewer but larger
and more efficient distribution centers; two, the consolidation
of our corporate staffs; three, efficiencies in purchasing,
especially in our generic programs, and improved buying and
vendor margin opportunities; four, lower financing costs and
improved working capital turns, for example, we expect to reduce
replenishment days in inventory; and finally, five, combining and
significantly enhancing our customer offerings and programs.
These synergies are tangible and achievable, and both companies
have a proven track record of consolidating and reducing costs in
their respective
operations in recent years. For example, at AmeriSource, we have
integrated CD Smith and Centralizer information systems. Bergen
Brunswig has done a significant amount of work to continue to
rationalize their distribution network.
As many of you know, each of our companies have network
expansions planned and this combination will allow us to
rationalize our investments and avoid duplicative capital
expenditures as we accommodate growth in our business. At this
time, we will not specifically address some of the details
regarding the integration, including the number and location of
DCs to be consolidated. But as we get closer to the completion of
the merger, we will then be in a position to provide more
information.
We do expect that our staffing levels will be reduced in
connection with the consolidation of the corporate and
distribution center level staffs. We have told our people that
senior management of both companies will work together to analyze
the capabilities of the two organizations in order to determine
the best possible organizational structure following the merger.
That is exactly what we are going to do.
At this point, I would like to turn the call over to Neil Dimick,
Chief Financial Officer of Bergen, who will take you through the
transaction.
N. Dimick Thank you, Kurt. I'd like to walk through the key components of
the combination. First of all, it's a stock for stock
transaction. Each share of Bergen Brunswig common stock will be
converted to 0.37 shares of the new company, AmeriSource-Bergen,
common stock. Each share of AmeriSource stock will be converted
into one share of AmeriSource-Bergen common stock.
The transaction will be tax free to shareholders of both
companies. The new company will have approximately 103 million
shares outstanding, current AmeriSource shareowners, owning
approximately 51% of the combined company, and current Bergen-
Brunswig shareowners, owning approximately 49%. Based on our
closing stock prices on Friday, the new company will have a pro
forma market capitalization of $5 billion.
Combined, the company will have approximately $2 billion of debt
and a total enterprise value of $7 billion. We do expect to pay a
quarterly dividend of $0.025 per share.
As we noted, the transaction will be accounted for as a purchase
transaction under new guidelines for business combinations
proposed by the Financial Accounting Standards Board. Under the
proposed new business accounting guidelines, the companies
anticipate that there will be approximately $10 million in annual
expenses related to purchase accounting adjustments. These
adjustments will be more than offset by the elimination of $23
million per year of goodwill amortization for the combined
company.
Under the proposed Financial Accounting Standards Board purchase
accounting rules, the transaction is expected to be non-dilutive
before synergies and special items. Under existing purchase
accounting rules, the merger will be accretive in the second full
year as synergies are realized, excluding special items.
We believe this transaction is a credit-enhancing event with no
additional debt, improved working capital turns and the increase
on operating cash flow through the realization of synergies that
will facilitate deleveraging. Based on discussions with our
financial advisors, we anticipate that we will
be able to refinance our respective credit facilities at
attractive rates. As many of you know, each of our management
teams has utilized return on committed capital matrix to evaluate
financial performance. And this will continue to be a cornerstone
of our financial philosophy going forward.
While the transaction has been approved by the boards of
directors of both companies, it is subject to Hart-Scott-Rodino
review, shareholder approval, confirmation of new FASB purchase
accounting rules and other customary closing conditions. As a
result, we do not expect the merger will close until the summer
of 2001.
I will now turn the call back over to Jeff, who will coordinate
the questions.
J. Zack Thank you, Neil.
Moderator Our first question comes from the line of Chris McFadden with
Goldman Sachs. Please go ahead, sir.
C. McFadden Thank you. Good morning. Congratulations to everyone on an
exciting transaction.
R. Martini Thank you, Chris.
C. McFadden Neil, you talked a little bit about the opportunity to refinance
some of the existing obligations for the two companies. Can you
clarify for us, is the potential gains from refinancing included
in the synergy calculation that you offered in your prepared
comments?
N. Dimick Chris, those financing opportunities are not included. The
synergies that Kurt has outlined, that $125 million, does not
include financing. We thing there are substantial opportunities
both within our current bank facility as well as some other debt
that the combined company has.
C. McFadden Thank you. As a follow-up, perhaps Dave or Kurt, could you just
talk a little bit about some of the PharMerica due diligence that
you were able to accomplish in preparing for this morning's
announcement, just to understand that business which is a bit
outside the traditional footprint for
AmeriSource? And how you are thinking about the execution on that
part of the business on a go forward basis? Thank you.
K. Hilzinger Thank you, Chris. It's Kurt. We had an opportunity to take a
fairly close look at PharMerica, as you would imagine, and I will
tell you we were quite pleased to see a substantial amount of
improvement in the operations, particularly in the last quarter
and what we expect for the remainder of the year. Chuck
Carpenter and the team there, I think, have done a terrific
amount of improvement over the last year and we are starting to
see some of the benefits of that in PharMerica's results.
I want to be careful here that AmeriSource doesn't get itself in
a position where we are commenting on Bergen's businesses until
the merger is closed. But I will tell you that we were very
pleased with first quarter results and we expect them to remain
on track for the remainder of the year.
D. Yost I will just add, Chris, that Chuck Carpenter, who heads up
PharMerica, is a person I've known in the industry a long time.
I have great respect for his
abilities. I was very impressed with the command of the business
he had during the due diligence process.
C. McFadden Great. Thank you. Congratulations, again.
D. Yost Thank you.
Moderator And our next question comes from the line of David Risinger with
Merrill Lynch. Please go ahead.
D. Risinger Thank you very much. I wanted to offer my congratulations also.
It looks like a phenomenal transaction.
D. Yost Thank you, David.
D. Risinger I have two questions. First, would you talk a little bit about
opportunities to accelerate growth in some of the specialty
operations, for example, the ASD division of Bergen Brunswig and
the American Health Packaging division of AmeriSource?
D. Yost Yes. David, I will tell you I think that ASD is one of the great
gems of this enterprise going forward, particularly with the new
biotech drugs coming to the market. In the future I think we
have a great opportunity to expand this business. Of course, we
are going to have the resources to devote to it, both financial
and human. I will tell you I am very excited about the prospects
of ASD.
Likewise, we have talked often about the opportunities within
Packaging. We think that's a great growth area, not only
supporting our current business in drug operations and specialty
businesses, like PharMerica and ASD, but also providing special
services to unique customers and to manufacturers.
So we are very excited about our prospects there. And with this
larger business base now that we have with the combined entity,
it makes the Packaging operation we have even more valuable and
greater opportunities.
D. Risinger That's great. With respect to the new FASB rules, could you talk
a little bit about how you see the new accounting flexibility and
any additional benefits that may accrue to you as a result?
N. Dimick This is Neil Dimick. Yes, David, we really view the new
accounting to be an opportunity for us. As you know, it
generally will be the purchase accounting that we've known in the
past. We've had our experts evaluate this. We don't think that
there will be, as I mentioned, significant amounts at all of
value that's allocated to the intangibles. In fact, we think the
amortization expense out of those will be less than $10 million a
year.
Importantly, the flexibility that allows the combined company to
deal not only with different transactions, but also to make
adjustments or disposals that won't affect the pooling of the
transaction. So we think the flexibility provided by the new
accounting is a real advantage for the new business.
D. Risinger That's great. Thank you very much.
N. Dimick Thank you.
Moderator And our next question comes from the line of Larry Marsh with
Lehman Brothers. Please go ahead, sir.
L. Marsh Thank you. Good morning, one and all. Some of these questions
you may have already addressed. I apologize for coming on late.
So if you've already said it, just say already said it.
First of all, Dave, I think you mentioned in the release that
some of your customers were actually asking for this merger to
take place. Under the assumption that customers would want
choice, could you, and you may have already done this, elaborate
any more specifically on the kinds of customers who are asking
you to do this and what their motivation might be in looking for
a merger like this?
D. Yost The words that I think I used were encouraging us to do the
transaction, Larry. We really had customers from literally all
of the different segments brought this up to us. So we are very
encouraged by that; that they would be very supportive of this
new organization that we've got going forward. That's part of
what motivated Bob and I to move forward with that, was the
strong customer support that we got.
R. Martini You know, Larry, that obviously is an area of great concern and
one that we needed to focus on very seriously because completion
of a transaction was of ultimate importance to us. Besides the
things that David has already mentioned, we will really be a much
more meaningful and stronger competitor to number one and two.
We do think that we bring about a lot of synergies and will be
much more competitive in the marketplace as a result going
forward.
But the last point was that one that David just mentioned. That
is really the one that brought it home for us. That is that we're
not only going to be more viable and be able to provide better
services and bring services to a new level, but these customers,
some of which were actually adversarial to prior transactions
that had been announced, were advocates to this transaction.
We've spoken to a number of customers and a number of customers
have come to us, and that was really the most meaningful thing in
making this evaluation.
So I just wanted to let you know that there has been a lot of
attention given to that, and we are very confident because of the
customer reaction as to our ability to get completion on this
transaction.
L. Marsh Great. That's helpful. And then to that same point, obviously
reflecting back several years ago when, I guess, there was a lot
of confidence expressed in a similar transaction. Besides the
fact that it sounds like some of your customers are advocating
you doing this, are there any other data points that you may not
have mentioned before that would allow you to have a lot of
confidence coming in front of the FTC in this transaction?
R. Martini Well, number one, Larry, the world is a different place than it
was in 1997. We are encouraged by the fact that the recent
wholesale drug operation that went before the FTC, the Cardinal-
Bentley, did not even get a second review. It went through it
very smoothly. And the fact that the entire environment has
changed, we think make this a totally different environment than
it was in 1997.
L. Marsh Great.
R. Martini I would just also add, Larry, there are clearly new entrants that
have come in that were not even around or envisioned in 1997.
L. Marsh Right. And would you also be able to contend that your market
share is less than 30% nationally?
R. Martini We don't really think that there is an absolute standard, Larry,
on the 30%. We think there is a great history of industries
where there are three competitors, and so we think that will
probably be the more compelling argument than a single data
point, that in fact can change quarter-to-quarter or year to
year.
L. Marsh One final quick thing, did I read it right to say all senior
managers are going to be moving to Valley Forge?
D. Yost We have not really worked through all of those details yet,
Larry. I think the most important thing to focus, though, on is
that all of the senior managers are totally committed to this
enterprise going forward, and in fact, are very, very
enthusiastic about it.
L. Marsh Okay. We'll stop there. Thanks a lot.
Moderator And our next question comes from the line of Glenn Santangelo
from Salomon Smith Barney. Please go ahead, sir.
G. Santangelo Yes. Thanks a lot. Just a couple of quick questions if I might,
we talked about the $125 million of synergies over the three-year
period, could you just sort of quantify for us what some of the
low hanging fruit is and how much could we expect in the first
year? And if you have any idea of maybe a potential for the
timing of the close of the transaction?
K. Hilzinger Well, let me start with the latter part first. I think we
indicated in the press release we are expecting closure by the
end of the summer. So at that point, integration activities will
start in earnest. We're hopeful that we will use this interim
review period to really put together the integration teams, staff
them properly from both organizations and really have a game plan
that we're ready to begin executing on at the closure of the
merger.
With regards to breaking the $125 million down by year, at this
time I don't think we are prepared, Glen, to kind of break that
out for people. As
we get closer to the closure of the merger, obviously, the
combined entity will be in a better position to give you specific
guidance in terms of how we expect the synergies to roll out.
It's clear though, as we indicated in the prepared comments, that
the economy is here, the opportunity to take out costs are very
significant and they are very tangible. In effect, you know we
are going to wind up, we've got two national distribution
networks today that will eventually be down to one. With that,
there are just enormous duplicative costs, both in operating
expenses, fixed costs, as well as capital that will go away.
G. Santangelo Okay. Earlier in the call, you sort of alluded to the fact that
there are some potential purchasing synergies that can be created
just by the fact that you're bigger. Do you think there is a
real potential opportunity on the gross margin side here?
K. Hilzinger We do. We absolutely do.
G. Santangelo I'm sure we think about that from a modeling perspective.
R. Martini Considering the latest ....
K. Hilzinger I would say, Glen, clearly the case of generics is an easy one to
focus on. We think that with the new generics that are going to
be coming on to the market that by having this combined entity
that is going to be representing a large amount of retail
business, in fact, about half of the combined entity will be in
the retail business focused on independent small and regional
chains for which we make the generic decision for many of those
people. We think we've got a great opportunity there.
We're clearly going to be a lot more efficient in terms of our
buying operation. So we think the procurement end does represent
some good opportunities for us.
G. Santangelo Those are real in the first year, you believe then?
K. Hilzinger They are clearly early on, Glenn, as we look at the spectrum of
when we will be phasing in synergies.
G. Santangelo And if I could just have one more follow up to the question Larry
asked, you talked about you spoke to some of your major
competitors. By looking at your customer mix break down, both of
you are very big in the institutional market or the health system
market, have you talked to any of the larger hospital systems to
make sure that they believe that the consolidation here doesn't
create any anti-competitive changes to the marketplace.
K. Hilzinger Yes, we have, Glenn. They've been very supportive. Of course,
both of us do business with the large group purchasing
organizations, but the business is won or loss on an account-by-
account basis, so locally, in the trenches. We think that this
transaction will be supported highly in the institutional market.
I've personally been on the phone visiting with people and have
gotten a very favorable reaction.
You've got to remember that we are putting together two companies
here that are noted for their service. So the cultures are not
only very similar, but the perception in the marketplace is very
similar regarding service for these two organizations, so we
think we're going to get a great response.
G. Santangelo Thank you for the comments.
K. Hilzinger Thank you, Glenn.
Moderator And our next question comes from the line of Robert Willoughby
with First Boston. Please go ahead, sir.
R. Willoughby Thank you. Can you comment on the capital expenditure outlook
for the combined company over the next couple of years? And I
guess on the flip side, if you can comment on how much capital
you might be able to pull out of the business? I know you've
suggested it's possible, but I imagine that would dwarf the
operating cost synergies, savings?
N. Dimick That is an excellent point, and one that we have analyzed as a
group. I would expect that the combined capital expenditures for
us will be reduced, I'm going to say 30%, because of the
duplicative costs. We have to look at the additions that we're
making that are duplicative, which we have.
With respect to working capital, that is a very important point.
When we combine these distribution centers, we found, and
AmeriSource found, that
there is significant reduction in inventory. If you
look at our combined inventories of over $3 billion, there are
certainly opportunities to bring that together, which in an
absolute dollar sense will dwarf the synergies, but it will be an
important addition to the cost of money savings that we will
enjoy as a result.
Thank you very much. Good question.
R. Willoughby Just another question, at the risk of my odd question there, what
are some milestones here for the closing? When do you expect
Hart-Scott-Rodino and are there shareholder meetings as yet
scheduled?
N. Dimick We'll be filing Hart-Scott very shortly. Of course, we would be
very grateful if the FTC saw from the get go, the meaningfulness
of this transaction. But we certainly would expect to wait at
least 30 days for their reply. In the event that there is a
second request, which we are prepared to deal with if that does
happen, that would take another 60 days. And then their final
reply to that, should that be necessary. Then a shareowner's
meeting to follow that. If you add those weeks up, it could end
up at the end of the summer, towards the end of the summer.
R. Willoughby That's great. Thank you.
N. Dimick Thank you.
Moderator And our next question comes from the line of Seth Teich from
First Union Securities. Please go ahead.
S. Teich Hello. Good morning. I was curious to know if you'd had any
preliminary talks at all with the FTC to sort of gauge their
reaction? And then I was wondering, also, if you could perhaps
review for us the market share by customer segments for each of
the companies?
R. Martini As far as any preliminary discussions with the Federal Trade
Commission, we really have relied on our advisors in any activity
such as that, but I can tell you that as early as this morning,
we have been in touch with the Federal Trade Commission. But as
you know, there won't be any comment there, of course, until such
time as we file Hart-Scott.
As far as market shares are concerned, the simplest way for me to
address that is to tell you actually that both companies probably
have about 50% of their market in what we would consider to be
retail sales and about 50% on the health system side. We really
don't break our market shares down any further than that.
S. Teich And then in terms of regionally, I know you sort of pointed out
in the beginning of the call that Bergen is more strongly suited
on the West Coast and AmeriSource is more on the east. I was
wondering, maybe on more of a revenue side, if you could perhaps
talk a little bit about the mix, East Coast versus West Coast,
for each of the companies?
R. Martini I think you really have to look at this in total. We haven't
used the Mississippi River or anything like that to differentiate
activity. Certainly, our activity is on a national basis and
it's servicing national accounts as well as regional and
independent. So we're going to look at this on the basis of the
way in which that service can best be accomplished, as Dave has
already talked about. Many synergies that are brought about in
everything will be related primarily to the best service to
customers and
high quality and also the savings that can be brought about so
that it can keep us in a very competitive situation.
S. Teich Great. And then one last question if I may, I just wanted to
know if there were any lock up provisions for senior management?
R. Martini Lock up provisions, yes, there are. The senior management of
both companies committed their vote to this transaction, and
enthusiastically so.
S. Teich Great. Thank you very much.
R. Martini Thank you, Seth.
Moderator And our next question comes from the line of Ray Lewis with
McDonald Investments. Please go ahead.
R. Lewis Yes. Thank you very much. Just two quick questions. Firstly,
Neil, on some of your comments, I think, and I just want to make
sure I heard this correctly, did you say that without the add
back of the goodwill
amortization you expected that synergies would make this deal
accretive in the second year?
N. Dimick The deal would be accretive in the second year with the
synergies, under existing accounting. In the new accounting, the
deal is non-dilutive from the start.
R. Lewis Okay. Great. And secondly, just relative to the sort of savings
that have been outlined here, is there any sort of way that you
can help us in terms of the proportion that might be coming from
the five items that Kurt highlighted in particular?
N. Dimick Well, I think each one of those have identifiable amounts, Ray,
but again, at this point, I think we are resistant to try to
break down the specific contributions, and we are resistant also
in sharing what we think the first year numbers are. I think it
is important to communicate to our investors though that we think
some of those synergies are available almost immediately at the
get go here. So there will be a savings that we can achieve
almost immediately upon completion of the transaction, it's just
a
matter of quantifying those synergies is what we'll hold off on
right now, until we get closer to closure.
R. Lewis And just tying back to your latest earnings call, I think you
talked about adding a facility in Georgia. Is that something
you're going ahead with or has that plan been put on hold?
N. Dimick We are committed to that facility. That's a facility that we
committed to about nine months ago as part of the ... roll out
process. So to meet that customer's needs, we will complete the
build out and opening of that facility, which is actually
scheduled in April. So we will complete that. Down the road,
how that facility fits into the distribution network, obviously,
is all of the distribution centers will be evaluated.
R. Lewis Great. Thank you very much.
N. Dimick You're welcome.
Moderator And our next question comes from the line of Michael Fitsgivens
with Morgan Stanley. Please go ahead, sir.
M. Fitzgibbons Good morning.
R. Martini Good morning.
M. Fitzgibbons You talked about making some tough decisions in your comments
earlier, and I'm wondering whether that includes some of the
contracts that you'll be inheriting? I know specifically, it
seemed like AmeriSource was not comfortable with the terms of the
PCS deal as they closed it. Is that the type of thing that you
guys are reevaluating? Are there other contracts that you might
be looking at?
D. Yost Michael, we are not specifically talking about contracts per se,
but I just want to leave you that there will be no holes barred
in what we evaluate. I mean clearly, as we look at the best of
the best, we are going to continue to use the criteria that Neil
talked about, which is return on committed capital. And all
decisions we make will ultimately reflect back to that. But we've
been very disciplined in the past in the way that we've conducted
our business and Bergen, of late, has clearly demonstrated their
resolve
in discipline. We want you to know that there will simply be
no ..., no holes barred as we go forward.
N. Dimick And we have every intention, of course, to meet the terms of any
contracts that we are associated with.
M. Fitzgibbons Okay. Thank you.
Moderator And our next question comes from the line of John Green with
Dresdner Kleinwort. Please go ahead.
J. Green Thank you. Hello, guys. Congrats on putting together the deal.
D. Yost Thank you very much, John.
J. Green You're welcome. You talked about your customer response being
basically positive, have you had conversations on the
pharmaceutical manufacturer, supplier side of a similar nature?
Can you give us any color on that?
D. Yost We've, of course, been in touch with manufacturers, and
particularly Bergen, over this last year. We've had a lot of
contact with manufacturers keeping them abreast as to what our
activities have been. I think the single most provocative thing
is that this combination will clearly enhance the credit profile
of both companies, and that is something that is received
extremely well. So I can tell you from direct and personal
contact that I believe that there aren't any concerns, as a
matter of fact, there's a lot of not only interest, but a lot of
support for the improvement of these two companies in competing
in the future and therefore, their credit profile and importance
to their distribution systems.
R. Martini I'd also add, John, it gives us the ability to develop new and
improved programs and to enhance programs we've got, develop new
programs. Some of those programs will be specifically tailored
toward our manufacturing partners. So from that regard as well,
we expect them to be very supportive and encouraging in this
transaction.
J. Green Great. Thank you. And just a real quick follow up, is it safe
to assume that there is no break up fees or collars associated
with the deal?
N. Dimick There are no collars associated with the deal. There is other
deal protection. I think the merger agreement will be made
available soon.
J. Green Okay. Great. Thanks a lot, guys.
N. Dimick You bet.
Moderator And our next question comes from the line of Ray Falchi with Bear
Stearns. Please go ahead.
R. Falchi Yes. Good morning. Thank you. You may have alluded to this a
little bit in your initial talk, but given that this is a
purchase, and you mentioned some of the new benefits of purchase
accounting, I was wondering if you could give us any color
related to potential divestitures you might consider, which
obviously, you have that flexibility under a purchase? And what
might trigger decisions to divest any business units or segments?
D. Yost Well we clearly, Ray, have great flexibility in the purchase
accounting, as Neil mentioned. That's one of the great
attributes of this transaction. It's way premature for us to
talk about any divestitures at this time.
N. Dimick I would just add that every business unit, every activity we do,
will be based on its return on capital. It will be important for
us to maintain the historical high returns that both companies
have enjoyed in the past. That would really guide us somewhat in
our strategy. Right now we are very encouraged with what we see
from every business unit.
R. Falchi Okay. Great. And one brief follow on if I may, on the
consolidation of the distribution centers, specifically, do you
anticipate, while you have ultimately some good long-term cap ex
benefits, as you noted earlier, do you think early on as you
consolidate, you may need to expand some of your sort of bigger
ones into super, regional type centers so that it will be
ultimately more cost effective? Is that part of the game plan do
you think?
D. Yost It could well be. I think what we anticipate right now is
clearly both distribution networks will contribute to the
combined network. There will be distribution centers from both
sides, and frankly, as part of our plans, we do anticipate
building some new facilities over time to really set a platform
that will take the company forward.
N. Dimick One of the issues we have right here is both companies, of
course, have very strong growth prospects. Those growth
prospects are even enhanced with this transaction. So we are
going to have to accommodate that growth as we rationalize our
distribution network.
R. Falchi Sure. Great. Thank you.
N. Dimick You bet.
Moderator And our next question comes from the line of Andy Speller with
AG Edwards. Please go ahead, sir.
A. Speller Hello, guys. I want to follow up on that last distribution
center question. It looks like you will probably, if my numbers
are right here, have an excess of something like 50 to 55 centers
between the two companies. What do you think an optimal number
is that you need? And also, Kurt, on your last conference call
you spoke a lot about new warehouse management systems and other
systems across your distribution network. Is it too early to
address what sort of platform is going to be used and how many
different platforms you are going to have when this thing is said
and done?
K. Hilzinger Well, let's talk about the number of facilities for a minute. I
think from AmeriSource's side, we have 22 pharmaceutical
distribution centers, assuming the opening of Atlanta in April.
Bergen, today, has 30. So combined we have 52. We would
envision a network that would be no larger than what Bergen has
today. So hence our conclusion that we are really going to be
closing down what amounts to one whole distribution network, with
sharing from both companies to that.
With regards to WMS, yes, that has been a focus within
AmeriSource. We believe that there are enormous operating
efficiencies available within the confines of each of our
distribution centers with that new technology. As part of the
distribution center build out plan, we do anticipate adopting a
WMS type system. I think the one we have at AmeriSource may, in
fact, fit the bill. But we have to do a little bit more analysis
against Bergen's information systems as well as our information
systems to see if that is ultimately the best answer. But, I do
think WMS is in the plans long-term.
R. Martini One of the great things about putting the companies together,
Andy, of course, is the base gets bigger. So you save a few
basis points and you get some significant savings. So we're very
excited about the prospects here.
A. Speller Okay, guys. Thanks a lot.
R. Martini You're welcome.
N. Dimick Thanks, Andy.
Moderator And our next question comes from the line of Bill Ryland with
Morgan Stanley. Please go ahead, sir.
B. Ryland Congratulations on the announcement.
R. Martini Thanks, Bill.
B. Ryland A detailed question for you, Neil. Can you give us a sense for
what you plan to do with the PharMerica bonds, especially with
respect to the change of control provision?
N. Dimick You know, Bill, we've, of course, had our attorneys studying
that. We haven't made any final, legal conclusions on that.
That debt is, I believe, eight and three-eighths; it's very good
debt for the combined company, but it's not debt that's not
refinancable or replaceable. So we'll finish our legal review
and make comment on that, but you are very correct, there are
change of control provisions there that may very likely cause
that debt to have to be replaced.
B. Ryland Great. Again, congratulations.
N. Dimick Thank you, Bill.
Moderator And our next question comes from the line of David Buck with
Buckingham Research. Please go ahead.
D. Buck Yes. Good morning. Some of my questions have been answered, but
one question for Kurt Hilzinger. Can you give a sense of what
percentage or what amount of the synergies you would expect to be
more of the cost
cutting type and what would be more of the economies of scale,
purchasing power, etc., in that $125 million?
And then a question for Bob Martini, just looking at the short-
term deal structure itself, it seems like Bergen has made some
strong strides in replacing the Novation business and PharMerica
is turning around. I was just curious on how the premium
determination was made? It seems a little bit low in my view.
And one question for David Yost on the combined company, the ASD
business, which as been a distribution business, any thoughts
longer-term of making that more of a pharmaceutical
distribution/pharmacy business going forward? Thank you.
K. Hilzinger David, it's Kurt. Maybe I'll start with your first question on
the percentage break down between cost cutting and percentage
economies of scale. As I had a moment here to try to think about
how to respond, it's a difficult question to answer because they
are somewhat interdependent. We clearly, in the consolidation of
a distribution center network, there are in fact, fixed costs
that go away, there are permanent costs that go away and there
are also benefits of scale in the size of the facilities. I
don't have a specific answer for you at this point. Clearly both
of them are important element steps driving the total $125
million that we're confident in.
R. Martini As far as your question on the combination, let me first describe
it as this is a real opportunity to build a new company, which is
going to have an extremely strong profile. And both companies,
both AmeriSource and Bergen, are going to be contributing their
assets and their expertise and all of their opportunities,
including the synergies that they both bring about to that new
corporation. Incidentally, if you were to track the market
capitalizations of both companies over some period of time, I
think you'd find them to be pretty close to being on top of each
other for an extended period of time. There have been dips and
valleys in that, of course.
But more importantly, and this is really one of the most
compelling issues in putting these two companies together, and
that is that while we have strong confidence in our ability,
independently, to continue to improve the return to our
shareowners, and I'm sure AmeriSource echoes that for their
company, but these two companies together can bring about
shareowner value, which will far exceed any shareowner value
improvement than either
of these two companies can do independently. That is a very
compelling reason to build upon this new company and to add to
the shareowner value of both companies, as they exist today.
D. Yost Regarding the ASD question, David, it's a little premature for us
to be commenting on the strategy of that until we get a little
closer to it.
D. Buck Okay. Thank you.
D. Yost You bet.
Moderator And our next question comes from the line of Frank Bianco with
McMahon Securities. Please go ahead.
F. Bianco Yes. Can you comment on what, if any, effect the deal has on the
convertible bonds outstanding?
N. Dimick We expect it to have no effect, Frank.
F. Bianco Very good. Thank you.
D. Yost If you could take the next question please, operator?
Moderator Okay. Our next question is from the line of John Park with Guard
Hill. Please go ahead.
J. Park Yes. Hello. I just have one remaining question. Are there any
other regulatory approvals that the companies would need besides
HSR?
D. Yost There are other regulatory approvals, but the other regulatory
approvals are very consistent with those that are required in
every transaction, not the least of which is the SEC and of
course, the New York Stock Exchange.
J. Park Okay. Thank you.
Moderator And our next question comes from the line of Casey Kleger with
Liberty View Capital. Please go ahead.
C. Kleger My question's been answered. Thank you.
D. Yost Thank you very much.
Moderator Our next question comes from the line of John Schaetzel with
GE Asset Management.
J. Schaetzel I do not have a question in.
D. Yost Thank you. It was nice to hear from you though, John.
J. Schaetzel Congratulations, in any case.
D. Yost Thank you very much, John.
Moderator And our next question comes from the line of Leo Murphy with
Pioneer Investment. Please go ahead.
L. Murphy Hello. Good morning. Can you hear me okay.
R. Martini Sure, Leo.
L. Murphy Congratulations. I've got a list here. I'm going to take the
option that those gentlemen just passed up. A couple of
questions. Number one, can you give me some idea, when you talk
about probably removing one distribution system, can you give me
some idea what the operating expense ratio is at the distribution
level, both for Bergen's distribution chain or chain of outlets
and for AmeriSource? I just want to get some idea.
K. Hilzinger Leo, it really depends on the size of the facility to some extent
and how well that facility is sized relative to its market. As
you've heard AmeriSource management talk about through the years,
the economies are driven at the local level. What's important is
that the facility be the right size. We have facilities that are
less than $0.5 billion that have terrific operating expense
ratios, as well as facilities that are over $1 billion that have
comparable ratios.
What we are talking about here by eliminating an entire
distribution network is we, in fact, eliminate duplicate costs.
Bergen, we've had a chance, obviously, to look at their numbers.
They do a superb job in cost management down at the distribution
level. I think AmeriSource has its
own proven track record there. So I think there are opportunities
if it's really an elimination of duplicate costs.
L. Murphy Kurt, excuse me, but what is the reported number for the most
recent fiscal year at the distribution level? What was your
expense ratio and what was Bergen's?
N. Dimick We don't report that separately, as you know, Leo. It depends,
of course, how much activity or overhead is taking place at the
local center. We track generally, more specifically, for
investors, the improvement that we're enjoying from year to year.
That generally has been in the area of 20 basis points. We've
already said on average at our distribution centers it's about
1.5% of revenues. Some of that is variable. Some of that is
fixed. Some would be subject to the effect of this opportunity.
Some would not.
L. Murphy Is AmeriSource comparable at 1.5%?
N. Dimick They are very, very comparable to us. Whether it's the 1.5%,
because they may be doing different services at the local level
as opposed to the central
level, but as we've analyzed each other's structure, there is not
a lot of differences in the expense ratios.
L. Murphy Okay. Let me move on to two other questions if I could. I'm
trying to understand something here. If I heard you correctly, I
think $10 million was the nut that you've got to carry from the
deal in year one, right? Ten million dollars in terms of the
purchase accounting?
N. Dimick Well, it is the nut, but there's a $23 million bolt that goes
through that in terms of the benefit that comes from not
amortizing goodwill. But $10 million is our first brush estimate
of the effect of amortizing the intangibles associated with the
acquisition.
L. Murphy Neil, I guess what I don't understand then, if $10 million is the
incremental nut, what I'm trying to understand is why it's not
accretive right from the gate in the sense of the deal. When
you're talking here about taking down $125 million over three
years on a $30 billion plus revenue base, we're talking like
$0.40 here over three years. I'm scratching my head saying you
guys have got to be really low-balling us here. This seems very
unrealistic. Okay? And put aside any working capital
improvements that flow through.
N. Dimick Well, as we mentioned, it does not include the effect of
financing and the effect of what we believe to be not only a more
favorable interest rate environment, but a more favorable credit
to finance. I would agree those estimates are conservative, but
if you know the history of these two companies, we want to
deliver what we comment on. That's paramount to us.
L. Murphy But Neil, I want to make sure I understand; there are no other
incremental costs in the deal that I have to work through my
model?
N. Dimick No, there are not. None that we have identified, that's correct.
L. Murphy And can I ask one last question, because it is important. The
generic issue I think Dave mentioned earlier, what percent of the
combined mix is generic volume, please? Volume of your
transactions?
K. Hilzinger Our mix of generics right now, Leo, is running in the
neighborhood of 8.5% to 9% of our pharmaceutical volume.
N. Dimick And that's very, very similar for Bergen.
I just want to comment, Leo, there obviously will be some one-
time items at the conclusion of this that would include severance
and so forth. But I know you are interested in the ongoing
costs.
L. Murphy I understand. The 8.5% to 9%, are we talking volume in terms of
revenue volume?
N. Dimick Yes.
L. Murphy Okay. And I assume that's probably close to 30% when they get in
on a unit base, but I'm not going to beat that into the ground.
And the last question, Neil, can you tell me what the pro forma
capitalization is going to be like? I missed the front end of
the ...
N. Dimick Yes. As we mentioned, based on the share prices on Friday, the
exchange would result in a market capitalization and equity value
of $5 billion. On average, about $2 billion of debt, enterprise
value of about $7 billion.
J. Zack Operator, we'll take one more question. Thank you.
L. Murphy Thank you.
N. Dimick Thank you, Leo.
Moderator Thank you. Our final question today comes from the line of Howard
Cappack with UBS Warberg. Please go ahead.
H. Cappack Thank you. Two questions if I could follow up on Leo's line on
the expense side of the equation, when could we expect, I guess
once the deal closes you will start to lay out sort of one-time
charges, or how are you going to take those, cash versus non-
cash? Do you have any preliminary number now?
N. Dimick We don't have a number on that, but I would expect as we develop
our communication over the next several weeks, we will have that
estimate well in front of the closing.
H. Cappack Okay. And then, when you look at strategy in terms of sales
force, between now and when the merger does close, in terms of
new business or contract extensions, I'm assuming if it's new
business you are not going to be competing against one another.
How are you trying to decide between now and the end of summer
which entity goes after what business?
D. Yost Howard, we will continue to run these businesses as clearly
independent organizations and it will be business as usual at our
operating levels. This is one of the great challenges that we
have, but we've been through this before, is to keep everyone
focused on the day-to-day operations. Each of our companies has
a strategy for doing that. So it will be business as usual at
the local level.
N. Dimick Howard, I would just like to add, this is Neil Dimick, as those
of you who followed us closely in 1997 during those mergers,
AmeriSource and Bergen were both the acquired as opposed to a
business combination like
this. Both of us came out stronger at the end of that process
than when we went into it, and we have every intention to
continue to strengthen our businesses during this process.
R. Martini And make no mistake, we intend to keep our eye on the ball and to
meet those commitments that have been put in front of you.
J. Zack Now we'd like to turn over the call to David Yost for some
closing remarks.
D. Yost Thank you very much. I'd just like to thank you for joining us
today and, in closing, I'd like to reiterate our excitement about
this combination and our confidence that we will effectively
combine the best people, programs and operations from each
company to emerge as an even stronger and more efficient player
in the pharmaceutical distribution business. When you do the
math and you combine the P&L reflecting the synergies, this
transaction will be clearly accretive, giving us the opportunity
to invest in new programs and services, which will increase our
growth. It enhances our confidence that we can sustain long-term
earnings per share growth of 20% and continue to create
significant shareholder value.
Thank you very much. Good day.
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