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Analysts: Celesio is a target of both Cardinal Health and McKesson

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Cardinal Health and another of the country's big three drug distributors are vying for a stake in a German peer, according to reports.

Germany's Celesio is a target of both Dublin-based Cardinal and rival McKesson Corp., according to two analysts who follow the industry. Celesio has hired Citigroup for advice on "a potential business collaboration," Reuters reported.

"This has been discussed in Europe for the past several months," said Ross Muken, an analyst with ISI Group. "The increased chatter in the press is somewhat confirmatory that something is happening, although the ultimate outcome is tough to gauge."

Based in Stuttgart, Celesio has 39,000 employees in 16 countries and annual revenue of about $28 billion, and it owns the Lloyds Pharmacy chain based in Great Britain, according to its website.

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Cardinal spokeswoman Debbie Mitchell said, "We do not comment on rumor or speculation."

During the past year, Cardinal has lost revenue in a pair of deals that did not go its way.In March, AmerisourceBergen Corp., the third major U.S. drug distributor, won a 10-year contract worth approximately $22 billion a year to supply Walgreens pharmacies. As part of the deal, Walgreen and European partner Alliance Boots can buy as much as a

23 percent stake in AmerisourceBergen.

The Walgreens contract was previously held by Cardinal, which also lost its longtime contract with Express Scripts, valued at $9 billion annually, to AmerisourceBergen in August.

Cardinal is Ohio's largest company by revenue -- $107.6 billion in fiscal 2012 -- but sales are expected to decline after the recent contract losses. In addition to its U.S. operations, Cardinal has operations in Canada, the Dominican Republic, Malaysia, Malta, Mexico and Thailand, and the company recently became the first U.S. drug distributor to operate in China.

"We are entering an era of global drug distribution, driven by the wave of generics," said Adam Fein, president of Pembroke Consulting.

Europe is an appealing target for American drug distributors, Fein said, because the market is more fragmented without dominant suppliers, favorable laws "sustain a higher level of profitability," and generics are not yet as prevalent as in the United States.

"This provides an opportunity for one of the big U.S. wholesalers to bring more generics to the European market," Fein said.

He thinks that Cardinal and McKesson have enough cash available to pull the trigger on a deal but that McKesson is the favorite.

"An advantage for McKesson is they have a lot of cash on their balance sheet sitting outside the U.S. and have chosen not to bring it back, based on the current corporate-tax structure, and they may need to spend it," Fein said.

However, he sees Cardinal as a serious player.

"Cardinal seems to be focused more on building their other businesses, such as their medical (equipment supply) business, and they have made a significant investment in China," he said. " However, Cardinal is looking for a game-changing move after the loss of Walgreens and Express Scripts."

After several years of declining profits, Celesio began reorganizing in 2012 and shed noncore assets, Muken said. The company recently began operations in Brazil.

"They're a challenged entity and need a U.S. partner with scale," Muken said. "AmerisourceBergen is already spoken for with Alliance Boots, so either Cardinal or McKesson make sense."

He thinks Cardinal has a better chance than McKesson of teaming with Celesio.

"Cardinal would be able to leverage the relationship (with Celesio) to improve their generic-purchasing power and could earn better margins and pass on the savings to their customers," Muken said. "And Celesio has some operations in emerging markets that could be of interest to Cardinal."

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@stevewartenberg

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