DBRS Places McKesson Corporation Under Review with Negative Implications

DBRS has today placed the ratings of McKesson Corporation’s (McKesson or the Company) Under Review with Negative Implications, following the Company’s announcement that it has signed an agreement to acquire a majority stake in Celesio AG (Celesio) and will launch a parallel voluntary public tender offer for the remaining publicly-traded shares and outstanding convertible bonds.

Celesio is a leading international wholesale and retail company and provider of logistics and services to the pharmaceutical and health-care sectors. Celesio generated approximately EUR 22.3 billion of revenue and EUR 579.6 million of EBITDA in F2012, and has approximately 38,000 employees across operations in 14 countries around the world.

The Under Review with Negative Implications placement reflects the expected increase in financial leverage that would result from the acquisition, as well as the risks associated with McKesson’s entry into new markets with different regulatory environments (including the achievement of targeted synergies). DBRS is therefore concerned that McKesson’s credit risk profile would no longer be consistent with the A (low) rating category.

McKesson has agreed to acquire the majority stake in Celesio of Franz Haniel & Cie. GmbH (Haniel), which represents approximately 50.01% of the total outstanding shares of the Company. The offer price per share of EUR 23 represents a significant premium over the three-month volume weighted-average price prior to market speculation. The total transaction, including the assumption of Celesio’s outstanding debt, would value Celesio at approximately $8.3 billion (EUR 6.1 billion). McKesson is aiming to benefit from Celesio’s complementary geographic footprint and potential synergies from enhanced scale, as the companies combined will form one of the world’s largest pharmaceutical wholesalers and provider of logistics and services in the health-care sector.

The share purchase from Haniel and tender offers are subject to certain closing conditions, including all necessary regulatory approvals and the acquisition by McKesson of a minimum of 75% of the shares of Celesio on a fully diluted basis.

McKesson expects to fund a portion of the transaction with cash-on-hand and a bridge financing facility. The Company’s permanent financing strategy will be determined by the timing and number of Celesio shares and convertible bonds tendered. The Company expressed its commitment to maintain an investment-grade-rated Company.

McKesson’s credit risk profile benefits from its efficient operations and its market position as the largest distributor of pharmaceutical and health-care products in North America. The ratings also reflect constantly evolving government regulations in health care, the high levels of competition in a typically low-margin industry and the risks associated with growth in the more cyclical Technology Solutions business.

In its review, DBRS will focus on (1) assessing the business risk profile of the combined entity, including potential benefits from enhanced scale and geographic diversification, as well as the risks associated with the integration and realization of the Company’s announced expected synergies of $275 million to $325 million annually by the end of Year 4 (following the completion of the required steps to obtain operational control of Celesio); (2) McKesson’s financial risk profile on a pro forma basis, subsequent to the Company’s announcement of a permanent financing plan; and (3) the Company’s longer-term business strategy and financial management intentions, including any de-leveraging plans. The tendering process is not anticipated to end until Q4 F2014, after which the Company is not expected to obtain operational control of Celesio until mid-F2015.

DBRS will proceed with its review as more information becomes available, aiming to resolve the Under Review status by the closing of the transaction.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.