DBRS Confirms McKesson Following Proposed US Oncology Acquisition

DBRS has today confirmed the Senior Unsecured Debt rating of McKesson Corporation (McKesson or the Company) at A (low) following the announcement that McKesson has signed a definitive agreement to purchase all outstanding shares of US Oncology, Inc. (US Oncology), a privately held company, for $2.16 billion, including the assumption of roughly $1.6 billion in debt. The impact of the acquisition is modestly negative to McKesson’s financial profile but not sufficient to warrant a change in the rating or the Stable trend. The transaction is expected to close at the end of the current calendar year, following customary closing conditions. DBRS has also confirmed the Commercial Paper rating of McKesson Canada at R-1 (low).

DBRS upgraded McKesson’s rating to A (low) from BBB (high) in December 2009 and had expected McKesson to remain acquisitive. The Company’s credit profile remains acceptable on a pro forma basis. McKesson has maintained a targeted debt-to-capital ratio of between 30% and 40% and should be in the mid to high end of this range when the transaction closes. Debt assumed from US Oncology is expected to be repaid with short-term debt and eventually refinanced with long-term debt. As of September 30, 2010, adjusted debt-to-EBITDA was roughly 1.0 times and adjusted debt-to-capital was in the high 20% range, both strong for the long- and short-term ratings. Important to note is that the recent authorization of up to $1 billion for share repurchases recently announced by McKesson is unlikely to affect the targeted leverage range (the Company remains committed to this range), and McKesson’s solid cash position of $3 billion (at September 30, 2010) provides financial flexibility.

The proposed acquisition is expected to be accretive to McKesson’s earnings in fiscal 2012 (March 31 year end) and additive to operating margins. The initial sales and earnings contributions will be modest on a consolidated basis but are expected to contribute to growth in its Distribution Solutions segment going forward. The US Oncology transaction is in line with the Company’s strategy of expanding its specialty services business with a focus on the high-growth oncology sector. US Oncology will broaden McKesson’s scale in the United States and notably lead to expanded distribution services, technology platforms and customer support (the combined businesses will cover close to 3,000 oncologists).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Consumer Products, which can be found on our website under Methodologies.