AmerisourceBergen (ABC) Ratings Affirmed by S&P Following MWI Veterinary Supply (MWIV) Announcement

Standard & Poor's Ratings Services today affirmed its 'A-' corporate credit rating on Chesterbrook, Pa.-based AmerisourceBergen Corp. (NYSE: ABC)(ABC). At the same time, we affirmed the 'A-2' short-term rating and 'A-' issue-level rating. The outlook is stable.

"The rating affirmation follows the company's announcement that it will be acquiring Idaho-based MWI Veterinary Supply Inc. (Nasdaq: MWIV) [unrated] for $2.5 billion," said Standard & Poor's credit analyst Michael Berrian. We believe that ABC has the capacity to fund this acquisition with $2.150 billion of debt, without impairing the rating, because the company has exceeded performance expectations and we believe it will reduce leverage quickly. Under this scenario, we estimate that pro forma leverage would increase to 1.5x, from 0.6x at Sept. 30, 2014.

ABC holds an important position as one of the three largest drug distributors, in a concentrated industry with high barriers to entry. Although ABC has a leading market share, size, and scope, the company is narrowly focused in a competitive industry and has customer concentration with Walgreens and Express Scripts contracts. More importantly, the business concentration leaves it exposed to unanticipated negative changes or trends in the pharmaceutical distribution industry. MWI is a leader in veterinary distribution and has annual revenues of more than $3 billion. However, since MWI is significantly smaller than ABC, the addition of this business provides negligible diversity to ABC's core pharmaceutical distribution business. Therefore, our assessment of a "satisfactory" business risk profile is unchanged with this acquisition.

The stable rating outlook reflects mid- to high-single-digit revenue growth over the next two years that, along with modest margin expansion and working capital benefits, will result in strong discretionary cash flow and modest deleveraging. The stable outlook also incorporates our expectation that the company's discretionary cash flow gives it the capacity to fund its share repurchase program.

We could lower the rating if ABC experiences lower-than-expected organic growth in the pharmaceutical distribution business or a lower-than-expected contribution from MWI. This would result in EBITDA declining below our base-case expectation, keeping leverage at 1.5x or more over the next two years. At the current pro forma leverage level, ABC does not have any debt capacity to fund additional acquisitions.

A higher rating is unlikely in the near term, given the narrow operating focus and the increase in leverage to 1.5x to fund the MWI acquisition.

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