Fitch: AmerisourceBergen's Rating Outlook Remains Negative Following PharMEDium Deal Announcement

CHICAGO--(BUSINESS WIRE)--

The Rating Outlook for AmerisourceBergen Corp.'s ABC 'A-' Issuer Default Rating (IDR) remains Negative, according to Fitch Ratings, following the announcement that the firm will acquire PharMEDium Healthcare Holdings, Inc. (PharMEDium) for approximately $2.6 billion.

PharMEDium is the largest provider of outsourced compounded sterile preparations to acute care hospitals in the U.S. The firm has been owned by private equity sponsors Clayton Dubilier & Rice since 2013 and generated 2014 revenues of roughly $375 million.

NEGATIVE OUTLOOK DRIVEN BY PROLONGED HIGH LEVERAGE

Incremental short-term and term loan debt of approximately $1.4 billion are expected to fund the deal, with the remainder of the purchase price being paid out of cash on hand. Resulting gross debt/EBITDA is expected to approximate 2x through fiscal year-end 2016. Elevated debt leverage is due, in part, to the issuance of $650 million of three-year notes in May 2014 to help fund ABC's strategy to offset dilution from the exercise of warrants by Walgreens in 2016 and 2017.

The Negative Outlook reflects the aforementioned temporary financing and incremental deal funding in the context of a longer-than-usual de-leveraging timeframe. Fitch maintains that gross debt/EBITDA of 1.3x-1.4x is the upper limit for the firm's current 'A-' ratings.

Fitch continues to believe ABC will be able to repay debt such that gross debt/EBITDA moderates to 1.4x or below by fiscal year-end 2017. This target is largely dependent on the use of cash - whether from warrant proceeds or cash generation - for the repayment of the bulk of outstanding term loans and the $650 million notes due in 2017. However, ABC's stock performance could alter the firm's updated plans for cash deployment as it pertains to management's commitment to offsetting warrant-related dilution.

STRATEGICALLY SOUND ACQUISITION

Ownership of PharMEDium by ABC should allow for the leveraging of each firm's relationships with hospital customers and adjacent roles within the drug channel to drive complementary growth opportunities that are independent of ABC's largest customers, Walgreens Boots Alliance Corp. (Walgreens) and Express Scripts Holding Corp. (Express Scripts). Almost half of ABC's revenues are sourced from these two large customers.

STRONG FCF HELPS TO OFFSET RISKS

ABC's FCF has been exceptionally strong in 2015, providing some relief to the risks outlined in February 2015 when Fitch revised the Rating Outlook for ABC's long-term IDR to Negative. Strong cash generation has been driven primarily by better than expected volumes and associated purchasing dynamics of generic pharmaceuticals. Both branded and generic drug pricing trends have also supported cash generation. FCF for the LTM period ended June 30, 2015 was $3.1 billion. Fitch expects fiscal 2015 (ended Sept. 30) FCF will exceed $3 billion.

Cash generation will remain strong through fiscal 2016, allowing for accelerated repayment of the $1 billion term loan borrowed to fund the acquisition of MWI Veterinary Supplies, Inc. and any short-term borrowings for the PharMEDium deal. Furthermore, ABC has indicated that its strategy to offset dilution associated with the Walgreens warrants is now complete.

Fitch plans to review the Negative Outlook in the context of recent deal funding, up-to-date financial results and developing business trends within the next six months.

Fitch currently rates ABC as follows:

--Long-term IDR 'A-';

--Senior unsecured term loans 'A-';

--Senior unsecured notes 'A-';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

Additional information is available www.fitchratings.com

Related Research:

--'Fitch Affirms AmerisourceBergen's Ratings at 'A-'; Outlook Negative' (Feb. 17, 2015).

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