Fitch: McKesson's Ratings Initially Unchanged by PSS World Acquisition Announcement
According to Fitch Ratings, the ratings of McKesson Corp. (McKesson) are unchanged following the company's announcement that it would acquire PSS World Medical, Inc. (PSSI). McKesson will pay total consideration for the deal of approximately $2.1 billion, including the assumption of about $480 million of PSSI debt. A full list of McKesson's current ratings follows at the end of this release.
Fitch views the deal as strategically sound, as McKesson and PSSI are two of the largest distributors of medical-surgical supplies, particularly to non-acute care customers, in the U.S. and Canada. While Fitch views it as likely that McKesson will use some debt to fund the transaction, Fitch expects credit metrics to remain consistent with the company's 'A-' credit profile.
Maintenance of McKesson's 'A-' Issuer Default Rating (IDR) will require debt-to-EBITDA generally maintained at or below 1.4x. Temporary increases above this range to fund M&A could be tolerated at the current rating level, so long as Fitch believes that the company is committed to using cash to return leverage to below 1.4x within 12 - 18 months. In the event that financing of the PSSI acquisition results in debt-to-EBITDA sustained above the 1.4x level, it could result in a downgrade of the ratings.
Fitch-calculated debt-to-EBITDA as of Sept. 30, 2012 was 1.2x, using figures from the company's second-quarter earnings release. Debt leverage has consistently decreased since the close of the $2.16 billion U.S. Oncology acquisition in December 2010, when it spiked to 1.6x on a reported basis from 0.9x at Sept. 30, 2010.
De-levering has come primarily from robust EBITDA growth in-line with Fitch's expectations, driven by the enormous wave of branded-to-generic conversions now taking place. McKesson has grown its LTM EBITDA margin by 10 bps since March 31, 2011. Fitch anticipates that another 5 - 10 bps of margin expansion could be achieved by the end of the company's fiscal 2013. Although not likely to affect 2013 results, the addition of the PSSI business will support overall margins and provide top-line growth offsetting declines from generic conversions.
Longer-term growth will be driven by the specialty pharmaceutical market and healthcare technology. McKesson is one of a handful of significant players in each of these relatively fragmented markets.
McKesson's liquidity profile remains strong. In addition to $2.8 billion in cash on hand, the company maintains an undrawn $1.3 billion revolver due Sept. 2016 and an undrawn $1.35 billion accounts receivable securitization facility due May 2013. Debt maturities are well-laddered and manageable for the firm.
Fitch currently rates McKesson as follows:
--Long-term issuer default rating (IDR) 'A-';
--Short-term IDR 'F2'
--Senior unsecured bank facilities 'A-';
--Senior unsecured notes 'A-';
--Commercial paper 'F2'.
The Rating Outlook is Stable. The ratings apply to approximately $3.58 billion of debt at Sept. 30, 2012, according to McKesson's 8-K, filed Oct. 25, 2012.
Additional information is available at www.fitchratings.com.
Jacob Bostwick, CPA, +1-312-368-3169
70 W. Madison Street
Chicago, IL 60602
Bob Kirby, CFA, +1-312-368-3147
Brian Bertsch, +1-212-908-0549
Media Relations, New York