AmerisourceBergen Corporation and Kindred Healthcare, Inc. have signed a non-binding letter of intent to combine their respective institutional pharmacy businesses, PharMerica Long-Term Care (PharMerica LTC) and Kindred Pharmacy Services (KPS), into a new, independent, publicly traded company. The transaction is intended to be tax-free to shareholders of both AmerisourceBergen and Kindred, a company release stated.

The new company would be the second largest in the institutional pharmacy services market. Based upon the six months ended June 30, 2006, annualized, unaudited revenues for the new company would be approximately $1.9 billion, with a customer base of approximately 330,000 licensed beds in 41 states, and annualized unaudited earnings before interest and income taxes (EBIT) would be approximately $75 million. Preliminary synergy cost savings from the combination is estimated to be approximately $30 million. The combination does not include AmerisourceBergen's workers' compensation business, PMSI, which is reported in its PharMerica segment, nor Kindred's hospital, nursing centre or contract rehabilitation businesses.

AmerisourceBergen currently provides pharmaceutical distribution to both KPS and PharMerica LTC and under the letter of intent would continue to provide those services to the new company. Kindred would provide information systems support and some administrative support services to the new company for a period of time.

Paul J. Diaz, Kindred president and chief executive officer, said, "This combination will create a national institutional pharmacy with greater scale that will allow it to compete more effectively in the marketplace, and will join two companies with the shared values of focusing on customers, employees, and patients, while at the same time unlocking greater value to our shareholders. After this transaction, Kindred will be able to more effectively focus its resources and capital on its hospital, nursing centre and contract rehabilitation businesses."

"This transaction is a huge win for patients, customers, associates, suppliers and shareholders," said R. David Yost, AmerisourceBergen Chief Executive Officer. "It will build on the best of both organizations as the new company becomes a national force in a growing market. This move will also allow AmerisourceBergen to concentrate on its strategic focus of pharmaceutical distribution, specialty pharmaceutical distribution and related services, and other pharmaceutical supply channel services such as packaging."

The combination is intended to be a tax-free transaction which would result in AmerisourceBergen and Kindred shareholders each holding 50 percent of the shares of the new company.

In connection with the transaction, PharMerica LTC and KPS will each make a one-time cash distribution, intended to be tax-free, of approximately $150 million to their respective parent companies, subject to potential adjustments at the closing of the proposed transaction.

PharMerica LTC and KPS will fund the distribution by borrowing approximately $150 million each for a total of $300 million of new debt. The new company will assume this debt as part of the proposed merger. This new debt would be the only long-term debt the new company assumes from the parent companies, leaving it with significant financial flexibility.

After the cash distribution, each of the institutional pharmacy businesses would be separately spun off to AmerisourceBergen and Kindred shareholders, to be followed immediately by a stock-for-stock merger which would result in AmerisourceBergen and Kindred shareholders each owning 50 per cent of the new company.

Deutsche Bank Securities is acting as financial adviser to AmerisourceBergen and Lehman Brothers is acting as Kindred's financial adviser.

The parties have engaged Heidrick & Struggles to conduct a national search for a chief executive officer and chief financial officer to lead the proposed new public company.

AmerisourceBergen and Kindred expect to sign a definitive agreement on or about September 30, 2006, and anticipate completion of the transaction in the first calendar quarter of 2007. In addition to entering into a definitive agreement, this transaction requires regulatory review by the Federal Trade Commission, and the Securities and Exchange Commission, and a favourable determination by the Internal Revenue Service.

Yost and Diaz added, "We are incredibly excited about the growth prospects for the new company and the great opportunities to gain additional business through organic sales and selective acquisitions. The newly created company will have ample synergy opportunities and the potential to significantly improve upon the automation of its packaging and distribution processes and the deployment of new technology offerings to its customers."

The proposed transaction will proceed only if the parties sign a definitive agreement and if all conditions to completion, including regulatory approvals, occur. There can be no assurance that a definitive agreement will be signed or, if a definitive agreement is signed, that all conditions to completion will be met.