DBRS Confirms McKesson after Agreement to Acquire Rexall Health

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of McKesson Corporation (McKesson or the Company) at BBB (high) with a Stable trend after today’s announcement of a definitive agreement to acquire Rexall Health from the privately held Katz Group. The total value of the transactions is $2.2 billion (CAD $3.0 billion). The acquisition is expected to close late in 2016 and is subject to regulatory approval in Canada under the Investment Canada Act and by the Competition Bureau.

Rexall Health is a major Canadian pharmacy retailer with approximately 470 locations located predominantly in Ontario and Western Canada and brings McKesson’s Canadian presence to over 13,000 employees. The acquisition will establish McKesson’s retail pharmacy presence in Canada and enhance its retail capabilities and procurement scale as well as complement its previously existing McKesson Canada wholesale and franchise business. Rexall Health will continue to have a dedicated management team and, similar to McKesson Canada, will be part of McKesson’s Distribution Solutions Segment. The acquisition is consistent with McKesson’s ongoing efforts to pursue vertical integration (in certain markets) and growth while diversifying geographically. DBRS views Rexall Health as having a strong brand and solid market position in key regions of Canada, but also notes its small size relative to McKesson (sales of $189 billion and EBITDA of $4.4 billion for the last 12 months (LTM) ended Q3 F2016).

McKesson has stated that the acquisition will be funded with a combination of cash and debt. On February 25, 2016, McKesson announced the acquisitions of Vantage Oncology and Biologics for a total transaction value of $1.2 billion. Despite the combined size of the transactions ($3.4 billion), DBRS believes that McKesson can maintain its key credit metrics pro forma the transactions at or near a level consistent with the BBB (high) rating (i.e., lease-adjusted debt-to-EBITDAR at or near 2.50 times (x)) based on its sizable cash balance and its existing debt capacity. At December 31, 2015, McKesson had approximately $3.4 billion of cash on hand and $8.7 billion of balance-sheet debt with lease-adjusted debt-to-EBITDAR of approximately 2.34x for the LTM. DBRS notes McKesson’s inherently strong free cash-generating capacity (after dividends) in the $2.5 billion per year range, which provides the Company with the ability to repay debt, if necessary, and to pursue its other financial management objectives, including share repurchases and further acquisitions.

McKesson’s ratings continue to be supported by its strong market position, diversified customer base, growth potential and favourable demographics for the pharmacy business, balanced by intense competition and risks associated with regulatory changes and growth. The Stable trend reflects DBRS’s view that McKesson’s operating performance will remain acceptable for the current ratings while the Company’s financial management intentions (including repayment or refinancing of maturing debt, further debt-financed acquisitions and/or share repurchases) would most likely determine any near-term rating actions.

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.