Fitch Ratings has assigned a 'BBB+' rating to the planned $4.1 billion
notes offering of McKesson Corp. (NYSE: MCK). The Rating Outlook is
Negative. A full list of ratings follows at the end of this release.
MCK plans to use the proceeds of its $4.1 billion notes, together with
other sources of liquidity, to repay the approximately $5 billion drawn
on the company's committed $5.5 billion bridge loan facility. The bridge
financing was used to fund the February 2014 purchase of approximately
76% ownership of Celesio AG (Celesio), on a fully diluted basis.
The Negative Outlook represents the large amount of de-leveraging
necessary to support the 'BBB+' ratings, plus the remaining event risk
remains surrounding future acquisition-related transactions and
processes. Significant setbacks in any of these areas requiring the use
of material amounts cash or external financing could drive a downgrade.
KEY RATING DRIVERS
-- The proposed debt issuance is in line with Fitch's expectations for
MCK's long-term financing for the acquisition of Celesio. Fitch
forecasts pro forma debt-to-EBITDA of around 2.5x at March 31, 2014; but
strong cash flows and a commitment to de-leveraging should facilitate
debt repayment such that debt-to-EBITDA will fall to below 2x by end
fiscal year (FY) 2016. Debt-to-EBITDA was 1.4x at Dec. 31, 2013.
-- MCK's acquisition of Celesio is strategically sound, though moderate
event risk remains as to the pacing and execution of subsequent steps in
the acquisition process.
-- Increased scale from the deal will allow MCK to drive cost savings,
particularly related to generic drug sourcing, and future growth. Fitch
sees MCK's strategy (outright M&A) for scale enhancement as somewhat
higher risk than those employed by its peers (primarily JVs). But MCK
could become best positioned to benefit from increased scale in the
medium term, particularly with the recently announced addition of Rite
Aid Corp. to the firm's OneStop Generics program.
-- U.S. drug distributors maintain exceptionally stable operating
profiles and consistent and strong cash generation, owing to steady
pharmaceutical demand and generally oligopolistic markets. Margins and
cash flows continue to benefit from the mostly durable effects of the
unprecedented generic wave, which is set to ramp up again in calendar
2014.
-- Fitch sees the European drug channel as somewhat less stable and
efficient, and generally higher risk, than the U.S. market due to
increased competitive/regulatory pressures. MCK's acquisition of Celesio
adds incremental but manageable business risk related to operating a new
business line (retail pharmacy) and engaging new geographies (Europe,
Brazil).
-- MCK holds top U.S. market positions in specialty drug distribution,
medical-surgical distribution, and healthcare IT, as well as drug
distribution in Canada. These businesses will support intermediate-term
growth and profitability and, in addition to measured expansion in other
non-U.S. markets, are likely to represent areas in which MCK will pursue
future growth opportunities.
RATING SENSITIVITIES
Maintenance of a 'BBB+' Issuer Default Rating (IDR) will require MCK to
direct sufficient cash flows toward debt repayment such that
debt-to-EBITDA of 2x or below is achieved over the next 24-30 months.
Fitch expects MCK's significant cash generating ability, enhanced by the
addition of Celesio in the intermediate term, to be sufficient to
achieve this target. Fitch forecasts cumulative free cash flow (FCF;
cash from operations minus capital expenditures minus dividends) to
exceed $4.5 billion in fiscal 2015-2016 for the combined firm.
Ratings flexibility will be limited during the de-leveraging timeframe.
Significant M&A activity or the resumption of large-scale share
repurchases in the next 2-3 years could contribute to downward ratings
pressure, to the extent that such actions restrict MCK's ability to
repay debt maturities as they come due. The addition of more long-term
debt than currently expected over this timeframe could also pressure the
'BBB+' ratings.
A positive rating action is not anticipated in the near-to-intermediate
term.
Fitch currently rates MCK as follows:
-- Long-term Issuer Default Rating (IDR) 'BBB+';
-- Unsecured bank facility 'BBB+';
-- Unsecured senior notes 'BBB+';
-- Short-term IDR 'F2';
-- Commercial paper 'F2'.
The ratings apply to approximately $4.9 billion of debt outstanding at
Dec. 31, 2013.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage' (Aug. 5, 2013);
--'Fitch: Drug Channel Aligns Further on McKesson-Rite Aid Deal' (Feb.
21, 2014);
--'Fitch Downgrades McKesson's L-T Ratings to 'BBB+'; Outlook Negative'
(Feb. 6, 2014);
--'Fitch: Event Risk Remains Heightened Following McKesson's Failed Bid
for Celesio' (Jan. 14, 2014);
--'U.S. Healthcare Stats Quarterly - Third-Quarter 2013' (Jan 2, 2014);
--'2014 Outlook: U.S. Healthcare - Secular Challenges Require a
Compelling Value Proposition' (Nov. 25, 2013);
--'Trekking the Path to Biosimilars - The Destination' (Oct. 4, 2013);
--'Vital Signs - Currents in the Drug Channel' (Podcast) (April 25,
2013);
--'Navigating the Drug Channel - Drug Distributors: A Deeper Dive'
(April 24, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
U.S. Healthcare Stats Quarterly -- Third-Quarter 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726356
2014 Outlook: U.S. Healthcare -- Secular Challenges Require a Compelling
Value Proposition
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724141
Trekking the Path to Biosimilars -- The Destination
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719802
Vital Signs -- Currents in the Drug Channel
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707243
Navigating the Drug Channel -- Drug Distributors: A Deeper Dive
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706690
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822596
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