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McKesson to Sell Sparkletts Unit to French Food Firm

Water: The $1.1-billion purchase would make Groupe Danone the second-largest home distributor in the U.S.


Striving to focus on its core health-care businesses after a year of financial missteps, drug wholesaler McKesson HBOC Inc. on Tuesday agreed to sell its Pasadena-based Sparkletts water division to French food giant Groupe Danone for $1.1 billion in cash.

For Danone, buying McKesson Water Products Co. will make the French company the second-largest distributor in the U.S. market for home- and office-delivered bottled water. Danone, which owns the Evian and Dannon Natural Spring Water brands, sells most of its water through retail stores.

Growth in bottled-water sales in the U.S. has outpaced growth in other beverage categories over the last few years. With the acquisition, Danone's share of the U.S. bottled-water market will more than double to 16.7% from 7.8%

By selling its water products unit, which also distributes Alhambra and Crystal brands, San Francisco-based McKesson will be able to concentrate on its business as the largest U.S. pharmaceuticals distributor, analysts said. The company's market value plunged after misleading accounting results were found at its information technology unit last year and it was forced to restate earnings.

McKesson shares jumped $3, or 12.5%, on the news of the deal, closing at $27 on the New York Stock Exchange Tuesday. Groupe Danone's American depositary receipts were unchanged at $48.56, also on the NYSE.

The sale is "a small positive step in the right direction" for McKesson, said Seth Teich, analyst at First Union Securities in San Francisco. He said that he rates the company a "hold" because of continued uncertainties in its businesses.

McKesson's water division had revenue of about $354 million in its fiscal year ended March 31, 1999. Nearly four-fifths of its sales came from direct delivery of bottled water.

Danone did not announce personnel changes at its new acquisition, but McKesson Water Products President Charles Norris said he does not expect his staff of nearly 1,800 Southern Californians to be cut. The company owns manufacturing plants in Los Angeles, Santa Ana and Anaheim, in addition to its headquarters in Pasadena and more than 50 distribution centers in the Southland.

Norris said Danone would benefit from McKesson Water's experience in home delivery, and its strong presence in 30 Western states. In exchange, "what Danone brings is the marketing view of a company that is a food brand maker, which clearly McKesson is not," he said.

McKesson is the largest wholesale distributor of pharmaceuticals in the U.S. With the acquisition last year of HBO & Co. it now is a major supplier of software for the health-care industry. The company warned Wall Street several years ago that limited capital would be invested in its water division, which was the last holding unrelated to health care, said Mike Krensavage, an analyst at Brown Bros. Harriman in New York.

Last year, McKesson was forced to restate earnings several times after discovering improperly recorded sales at HBO & Co., which it bought in January 1999. McKesson shares dropped sharply, leading shareholders to file nearly 60 suits against the company by November. Its price recovered slightly Tuesday, but was still far from its 52-week high of $89.75.

Norris said that Danone may wind up using a single brand name for its water products in the U.S., but no immediate changes to McKesson brand names were planned.

Officials of the two companies met in New York early Tuesday to sign the deal after it had been approved by each company's board. The transaction, expected to close by the end of the quarter, still needs approval from the Federal Trade Commission.

Paris-based Danone has been selling assets to focus on mineral water, dairy products and cookies. It also is part of a group that is planning to buy United Biscuits, Britain's biggest cookie maker.

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