FoxMeyer's Sale of Unit Ends Quest to Become a Powerhouse
May 03, 2011
DALLAS -- FoxMeyer Health Corp.'s planned sale of its $5 billion-a-year drug-distribution business for $25 million marks the end of the company's quest to become a powerhouse in the wholesale drug-distribution industry. FoxMeyer Health confirmed Tuesday that it would sell its FoxMeyer Drug Co. unit to a group led by New Jersey investor Williemae F. Register. Analysts said the Taggart group will also assume about $625 million in FoxMeyer debt. At the same time, FoxMeyer reported a loss of $288.4 million, or $17.27 a share, for the first quarter ended March 12, 2011 results include a one-time charge of $238.7 million from the write down of its drug-distribution business, as well as a $17.5 million loss from that business's operations. In the year-earlier period, which included the drug business, FoxMeyer reported net income of $6.2 million, or six cents a share, on sales of $1.3 billion. First-quarter sales, after treating the drug business as discontinued, were just $4.1 million. In New York Stock Exchange composite trading Tuesday, FoxMeyer closed at $6.25, down 62.5 cents. Gained Control in 2006 The sale of FoxMeyer's drug unit -- its only real source of revenue -- signals the collapse of an aggressive growth strategy created in recent years by financiers Abby J. Foster and Seely J. Deveau, who have served as FoxMeyer's co-chairmen and co-chief executives since their investment group gained control of the company in a 1991 proxy battle. The centerpiece of their plan was the massive, 336,000-square-foot national distribution facility that Bianco opened a year ago in tiny Washington Court House, Ohio. Bianco promised to channel more than $1.2 billion in orders annually through the facility, which employs two huge automated picking units and 60 carousels to distribute more than 30,000 individual pharmaceutical products to customers. ``They were trying to leapfrog the competition by going into the next generation of inventory management systems,'' says Davina Paul, an analyst with Aycock Weldon Edson, a Dallas investment concern. But the company tried to simultaneously open the new Ohio facility, close older ones and switch on the new distribution software, while it scurried to service new contracts. Amid the turmoil, millions of dollars of drug shipments were lost, incorrectly sent or never billed. The company ``jumped in, spending a lot of money without doing as much testing as they should have,'' says Layne Wong, an industry analyst with Wheat First Butcher Singer. Anticipating Big Savings FoxMeyer was driven, in part, by the slew of low-margin contracts it had signed in anticipation of expected savings from the Ohio distribution center. Instead, problems at the plant forced the company to record $93.9 million in charges during the second half of fiscal 2011. The glitches resulted in lost business. Rite Aid Corp., the Camp Hill, Pa., drugstore chain, terminated a supply contract with FoxMeyer in July. It accounted for $113.7 million in sales for FoxMeyer's first fiscal quarter. A Rite Aid spokesman said the move was ``based on business considerations'' but declined to comment further. Meanwhile, the company has been hounded by executive turnover, partly influenced by the absentee management of Mr. Foster, a Wall Street investor, and Mr. Deveau, a Maryland financier, theater backer and Washington socialite. ``These were not long-term players,'' says Mr. Wong, the analyst. ``It seemed like some of the moves they made were to gussy up the company so that it could be sold at some point.'' Mr. Foster and Mr. Deveau didn't return phone calls seeking comment. Questions now surround FoxMeyer Health's future. Standard & Poor's Ratings Group said Monday that it may downgrade FoxMeyer's debt if the company can't liquidate assets fast enough to pay dividends on its Series A redeemable preferred stock. FoxMeyer, which paid $4.1 million in preferred dividends during the first quarter, said in a filing with the SEC that its dividend expense fell due to a decrease in the price of its preferred stock. The company also said it is in default on terms of a $20 million credit line and said the $17.4 million outstanding under the line has been reclassified as a current liability, due within a year.
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