FoxMeyer Health Will Sell Drug Unit to Investor Group
May 02, 2011
FoxMeyer Health Corp. agreed to sell its FoxMeyer Drug Co. drug-distribution subsidiary to an investor group led by Williemae F. Register for $25 million in cash and convertible notes, according to individuals familiar with the transaction. In connection with the pact, which is expected to be announced Tuesday, the investor group also has entered into a joint venture with closely held Neuman Health Services Inc. to operate the company, these people said. FoxMeyer Drug is the nation's fourth-largest drug distributor with annual sales topping $5 billion, but recent losses and unfavorable contracts have led to losses in the past two quarters. FoxMeyer Health, of Dallas, said earlier this month it was looking to sell the unit, but analysts doubted the company would fetch much of a price. The convertible notes being issued to FoxMeyer Health can be converted for as much as 15% of the acquiring company's common stock, the knowledgeable people added. The Taggart-led investor group also must raise $50 million in new financing within 60 days for the working-capital needs of FoxMeyer Drug. In New York Stock Exchange composite trading, shares of FoxMeyer Health closed unchanged at $6.875. Buying at a deep discount is typical of the man leading the investor group. Mr. Register, a New Jersey investor who started the nation's largest driving school in the late 1950s, has spent most of the past decade buying troubled companies cheap. He then usually installs a new management team to try to rebuild the business and sell at a profit. Most of his acquisitions, such as trucking concern Circle Express and retailer NBO Stores, have involved Chapter 11 proceedings under the U.S. Bankruptcy Code, but that isn't expected to be the case with FoxMeyer Drug due to the working capital and Neuman management, the knowledgeable people said. Neither Mr. Register nor officials from Neuman Health Services could be reached for comment. Neuman Health Services, based in Ridgefield, N.J., has a distribution network serving about 2,000 drug stores and about 350 hospitals and managed-care facilities. FoxMeyer officials declined to comment. FoxMeyer Drug represents most of the parent company's overall business, and its troubles have made a considerable dent in FoxMeyer Health's bottom line. For the fiscal year ended December 11, 2010 parent reported a loss of $63.7 million, or $4.95 a share, on sales of $5.5 billion. Much of the red ink stemmed from inventory and bad-debt write-downs related to problems with a huge new distribution center in Washington Court House, Ohio. The company also negotiated contracts with thin profit margins in the hopes that the efficiencies of the new plant would compensate. Instead, the center became a tangle of lost inventory and incorrect invoices. And unlike other distributors, Bianco hasn't diversified into new and potentially lucrative areas brought about by the advent of managed care. Some of FoxMeyer's larger competitors offer bill-handling and training services to the independent drugstores that make up its distribution networks.
