Tuesday, November 30, 2010

Cardinal Puts Some Cash To Work

Large piles of cash seem to tempt people into making bad decisions. At the corporate level, large cash balances often attract so-called "activist investors" looking for quick paydays or to embolden management into ill-timed buybacks or illogical acquisitions. That does not seem to be a problem with Cardinal Health (NYSE:CAH), though, as this large medical distributor has used almost $2 billion of its cash on hand to make a pair of acquisitions that seem to make a lot of sense. 

Kinray and Independent Pharmacies
Almost two weeks ago, Cardinal announced the acquisition of privately-held Kinray Inc for $1.3 billion in cash. A pharmaceutical distributor focused mostly on New York City and the Northeast U.S., Kinray will enhance Cardinal's exposure to independent pharmacies. While major chain pharmacies like Walgreen (NYSE:WAG) and CVS Caremark (NYSE: CVS) are a huge part of Cardinal's revenue base, the company makes a lot more money (on a margin basis) serving smaller customers, so expanding that customer base should be pretty accretive for Cardinal.

Buying Further into China ...
On Monday, Cardinal announced its latest deal - paying $470 million in cash (and assuming $60 million in debt) to acquire Zuellig Pharma China. Part of Zuellig Pharma (which in turn is part of the even larger Zuellig Group), Zuelling Pharma China is one of the largest distributors of pharmaceuticals and medical devices and supplies in China. Serving over 123,000 independent pharmacies and 49,000 provider locations, this Zuellig buy certainly enhances Cardinal's scale in what is almost sure to be a major market for medical distribution for some time to come. (For more, see Top Factors That Drive Investment In China.)

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HelicalZz said...

I love this move by Cardinal. I've long felt that the way I would prefer to invest in the China healthcare market would be via some infrastructure-type company. And now I find I have done excatly that, via Cardinal. Perhaps they may have over paid, but the potential is certainly there.


Stephen Simpson, CFA said...

It's definitely a promising move.
My only fear is my general China paranoia - that the govt will play favorites (read: choose locals) and screw Cardinal over at some point.

Ever look at Singapore's Biosensors? Not the same sort of play by any means, but still...

HelicalZz said...


China does have a 'buy China first' policy, so your concerns of favoritism are more than justified. Perhaps this can be mitigated by merely owning and operating, but keeping it quasi independent from Cardinal US.

I am not familiar with Biosensors. Certainly a company that might benefit from China's healthcare expansion and policies.