DBRS Maintains Under Review with Negative Implications on McKesson Corporation

DBRS has today maintained the ratings of McKesson Corporation (McKesson or the Company) at Under Review with Negative Implications following the Company’s announcement that it has reached a new agreement to acquire over 75% ownership of Celesio AG (Celesio) on a fully diluted basis. DBRS originally placed the ratings of McKesson Under Review with Negative Implications on October 24, 2013, following the Company’s announcement that it had signed an agreement to acquire a majority stake in Celesio and would launch a parallel voluntary public tender offer for the remaining publicly traded shares and outstanding convertible bonds. The offer was conditional upon McKesson reaching ownership of 75% of the Company on a fully diluted basis. On January 13, 2014, the Company announced that it was unsuccessful in reaching the 75% completion condition in its offer for the outstanding shares and 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 status 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 entire holding in Celesio of Franz Haniel & Cie, GmbH, which represents a majority of the total outstanding shares of the Company for EUR 23.50 per share. In a separate agreement, McKesson also announced the acquisition of Celesio convertible bonds from Elliott, which would allow McKesson’s ownership after closing to exceed 75% on a fully diluted basis.

The total transaction, including the assumption of Celesio’s outstanding debt, would value Celesio above $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 combined the companies will form one of the world’s largest pharmaceutical wholesalers and provider of logistics and services in the health-care sector. McKesson has stated that it expects to realize annual synergies in the $275 million to $325 million range by the fourth year following operational control.

The announced agreements are not subject to any closing conditions and are expected to close within ten business days. The Company’s voluntary tender offer to the remaining minority holders of Celesio common shares is expected to commence shortly after the close of the transactions.

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 following the closing of the transactions.

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 risks associated with growth in the more cyclical Technology Solutions business.

In its review, DBRS will continue to 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 four; (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 deleveraging plans.

DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review with Negative Implications status once permanent financing plans are announced.

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

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

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