DBRS Confirms McKesson at A (low) and R-1 (low), Stable Trends, Following Acquisition of PSS World Medical, Inc.

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt ratings of McKesson Corporation (McKesson or the Company) at A (low) and the Commercial Paper rating of McKesson Canada at R-1 (low), both with Stable trends, following the Company’s announcement that it has signed a definitive agreement under which McKesson will acquire all outstanding shares of PSS World Medical, Inc. (PSS) for approximately $1.46 billion.

McKesson is expected to finance the acquisition with a combination of cash-on-hand (which, including cash-equivalents, totalled approximately $2.8 billion at Q2 F2013) and incremental debt, in addition to assuming approximately $480 million of PSS debt. The confirmation of the ratings is based on DBRS’s view that leverage levels will remain acceptable for the current rating category despite the increase in debt levels, as well as McKesson’s proven track record of successfully integrating acquisitions. The acquisition, which can be treated as a tuck-in due to PSS’s smaller relative size, is expected to further enhance McKesson’s extensive distribution capabilities and product and technology expertise, while adding a broad portfolio of business services.

Headquartered in Jacksonville, Florida, PSS is a marketer and distributor of medical products and services to caregivers throughout the United States with over 4,100 full-time and part-time employees. In the last 12 months ended Q2 2012, PSS generated revenue of approximately $2.1 billion and EBITDA of approximately $171.3 million. In addition, McKesson has stated that it expects to generate approximately $100 million of cost synergies within four years.

McKesson’s current ratings continue to be supported by its strong market position as the largest distributor of pharmaceutical and health-care products in North America, its efficient operations and its strong free-cash flow generating capacity. The ratings also reflect the high level of competition in a typically low-margin, highly regulated industry. DBRS expects that McKesson will continue to use free cash flow and cash-on-hand to invest in growth or to complete additional share repurchases. However, should the Company choose to use debt for such purpose, DBRS expects that it will be of the magnitude that will maintain credit metrics within the range acceptable for the current rating category. Should credit metrics deteriorate (i.e., lease-adjusted debt-to-EBITDAR beyond 2.0x) for an extended period, due to weaker-than-expected operating performance or more aggressive-than-expected financial management, the ratings could come under pressure.

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

The applicable methodology is Rating Companies in the Merchandising Industry (May 2011), which can be found on our website under Methodologies.