Cardinal Health has paid $470 million to buy 100% of China’s largest pharmaceutical importer, Zuellig Pharma China, which is known locally as Yong Yu. The management team of Yong Yu will also join Cardinal.
Yong Yu is closely held and owned by Hong Kong-based Zuellig Pharma, which is part of the Zuellig Group. Zuellig Pharma was started by the Zuellig family 60 years ago in the Philippines and has grown into a business spread across 15 countries in Asia with a focus on distribution services for the healthcare industry. The group is now professionally managed and had a turnover of around $12 billion in 2009. In a press release announcing the deal, group CEO William Meaney said the decision to exit was driven by a consciousness of "the extent of resources required to participate successfully in a market with significant growth in volumes and consolidation among industry participants".
Cardinal has been keen to establish a presence in China for a while, said a source, but needed to work around the fact that most of the companies in this sector are state-owned. The parties knew each other so a formal introduction was not made by advisers. However, each side worked with an investment bank to structure the current deal. Cardinal was represented by J.P. Morgan, while Zuellig worked with Credit Suisse.
“Cardinal Health is well positioned in the pharmaceutical distribution market in China, which is expected to grow at a compound annual growth rate of 20% through 2014 and become the second largest pharmaceutical market in the world after the United States,” the Ohio-based company said in a written statement announcing the deal.
Yong Yu was set up in 1993 to tap into the potential of China and Eric Zwisler joined the Zuellig group from American Cyanamid in 1994 with a remit to expand the business. Zwisler is responsible for having secured approvals from China’s Ministry of Commerce for Yong Yu to become the country’s first foreign-invested pharmaceutical distribution company in China.
“He has negotiated, established and operated all forms of foreign investment in China, from minority share JV’s to wholly foreign-owned enterprises and is well versed in the acquisition and integration of Chinese state companies having acquired five state distribution companies,” according to a recent CV of Zwisler.
Yong Yu’s current sales exceed $1 billion and its footprint covers 31 of the 34 provincial-level administrative units in China through its direct-to-customer distribution centre network and a comprehensive network of wholesalers. Yong Yu spans the distribution value chain from imports to national supply chain management to local direct distribution to approximately 49,000 hospitals and clinics, and more than 123,000 pharmacies. The company also has a growing business distributing medical-surgical products.
In January 2009, Zwisler became CEO of Zuellig Pharma Asia Pacific, which is the holding company above Yong Yu. Zwisler, who is also president of Yong Yu, and all the other members of the Yong Yu management team have joined Cardinal Health.
“Zwisler is integral to the transaction,” said a source close to the deal. “He has grown the China business from scratch, speaks fluent Mandarin and essentially Cardinal is backing him as well as the business.”
This is the second large M&A deal Cardinal has announced this month, following the $1.3 billion takeover of Kinray, a pharmaceuticals distributor based in New York.
“The Zuellig deal is not large enough for shareholder approvals to be an issue for Cardinal,” said the source. Cardinal registered $98.5 billion in revenue in the 12 months to June 2010.
However, Zuellig and its advisers took no chances as the deal has been announced only once completed, a luxury available because Yong Yu is closely held. The same pair of advisers worked on Charles River Laboratories' proposed takeover of Wuxi PharmaTech earlier this year when J.P. Morgan advised CRL and Credit Suisse represented WuXi. That deal had to be withdrawn when CRL’s shareholders baulked at the $1.6 billion price tag for the Chinese drug research and development outsourcing company.
The Yong Yu deal will be mildly accretive to earnings in 2011 and meaningfully accretive thereafter, Cardinal said.
