Moody's Assigns Negative Outlook to McKesson's (MCK) $4.1B Unsecured Offering
Tweet
Share
E-mail
Up)
Moody's Investors Service confirmed McKesson Corporation's (NYSE: MCK) existing Baa2 and Prime-2 ratings and assigned a Baa2 rating to McKesson's new $4.1 billion in senior unsecured notes. The rating outlook is negative. This concludes Moody's rating review that was initiated on October 24, 2013.
Proceeds of this note offering will be used to partially refinance borrowings under a bridge facility that was drawn to fund the purchase of 75% of the shares on a fully diluted basis of Celesio AG. McKesson acquired 75% of the shares of this German drug wholesaler and operator of retail pharmacies for about $5.1 billion. With 75% ownership, McKesson is required to consolidate Celesio's financials under GAAP. Celesio has about $2.0 billion in existing debt and about $1.5 billion in adjusted debt.
Ratings confirmed:
McKesson Corporation
Existing senior unsecured notes at Baa2
Senior unsecured shelf at (P)Baa2
Short-term rating at Prime-2
McKesson Canada Corporation
Backed commercial paper at Prime-2
Rating assigned:
McKesson Corporation
New $4.1 billion in senior unsecured notes at Baa2
RATINGS RATIONALE
Moody's believes that the $4.1billion debt offering represents the basis of McKesson's permanent financing plan and that the company will seek to use excess cash for the purchase of the remaining shares of Celesio. If short-term borrowings are used -- due to timing purposes -- they would likely be repaid relatively quickly. Moody's further believes that McKesson is committed to deleveraging, both by repaying debt and through improvements in EBITDA. As a result, financial leverage, which initially will be outside of Moody's expectations for McKesson's Baa2 ratings, would likely return to pre-Celesio levels within 2 to 3 years following the acquisition. That said, there are risks associated with the transaction that create concern.
"Although Celesio's retail pharmacies offer better margins than drug distribution, they operate in highly competitive and heavily regulated markets and represent a new business line for McKesson," said Diana Lee, a Moody's Senior Credit Officer.
Celesio will increase McKesson's revenue base by about 25% and will enhance its position as a leading drug wholesaler beyond the US by adding a solid presence in Europe. The transaction will also diversify McKesson's revenue and profit streams by adding ownership of about 2,200 retail pharmacies in Europe. McKesson estimates that it can achieve between $275 million and $325 million in annual synergies, largely related to generic drug procurement, within four years following the transaction.
McKesson's Baa2 ratings reflect its large revenue base and its position as a leading drug distributor in the US. The rating also reflects relatively thin operating margins that remain subject to pressure as well as relatively high customer concentration. Low distribution margins will be augmented by its newly acquired higher margin retail pharmacy segment, as well as McKesson's higher margin technology solutions business, although this segment also faces challenges. The drug distribution sector will undergo change over the coming years as all three large US players have entered arrangements to increase scale in purchasing generic drugs.
The negative outlook reflects Moody's concerns about McKesson's relatively high financial leverage post Celesio, its entry into new, highly regulated and competitive geographies, as well as retail pharmacy ownership. However, the outlook also incorporates Moody's expectation that the company is committed to deleveraging through both EBITDA improvements and debt repayment over the next few years.
If the company is not able to deleverage because it experiences lower than expected profitability or cash flows or it engages in additional acquisitions or buybacks, the ratings could be downgraded. If McKesson's deleveraging does not result in debt/EBITDA that approaches 2.5 times in the next 12-18 months, ratings could be downgraded. Though not anticipated in the near future, the ratings could be upgraded if McKesson is able to raise margins by realizing synergies, improving retail operations and by overcoming any regulatory constraints. Debt/EBITDA sustained below 1.75 times could support an upgrade.
The principal methodology used in this rating was the Global Distribution & Supply Chain Services published in November 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Proceeds of this note offering will be used to partially refinance borrowings under a bridge facility that was drawn to fund the purchase of 75% of the shares on a fully diluted basis of Celesio AG. McKesson acquired 75% of the shares of this German drug wholesaler and operator of retail pharmacies for about $5.1 billion. With 75% ownership, McKesson is required to consolidate Celesio's financials under GAAP. Celesio has about $2.0 billion in existing debt and about $1.5 billion in adjusted debt.
Ratings confirmed:
McKesson Corporation
Existing senior unsecured notes at Baa2
Senior unsecured shelf at (P)Baa2
Short-term rating at Prime-2
McKesson Canada Corporation
Backed commercial paper at Prime-2
Rating assigned:
McKesson Corporation
New $4.1 billion in senior unsecured notes at Baa2
RATINGS RATIONALE
Moody's believes that the $4.1billion debt offering represents the basis of McKesson's permanent financing plan and that the company will seek to use excess cash for the purchase of the remaining shares of Celesio. If short-term borrowings are used -- due to timing purposes -- they would likely be repaid relatively quickly. Moody's further believes that McKesson is committed to deleveraging, both by repaying debt and through improvements in EBITDA. As a result, financial leverage, which initially will be outside of Moody's expectations for McKesson's Baa2 ratings, would likely return to pre-Celesio levels within 2 to 3 years following the acquisition. That said, there are risks associated with the transaction that create concern.
"Although Celesio's retail pharmacies offer better margins than drug distribution, they operate in highly competitive and heavily regulated markets and represent a new business line for McKesson," said Diana Lee, a Moody's Senior Credit Officer.
Celesio will increase McKesson's revenue base by about 25% and will enhance its position as a leading drug wholesaler beyond the US by adding a solid presence in Europe. The transaction will also diversify McKesson's revenue and profit streams by adding ownership of about 2,200 retail pharmacies in Europe. McKesson estimates that it can achieve between $275 million and $325 million in annual synergies, largely related to generic drug procurement, within four years following the transaction.
McKesson's Baa2 ratings reflect its large revenue base and its position as a leading drug distributor in the US. The rating also reflects relatively thin operating margins that remain subject to pressure as well as relatively high customer concentration. Low distribution margins will be augmented by its newly acquired higher margin retail pharmacy segment, as well as McKesson's higher margin technology solutions business, although this segment also faces challenges. The drug distribution sector will undergo change over the coming years as all three large US players have entered arrangements to increase scale in purchasing generic drugs.
The negative outlook reflects Moody's concerns about McKesson's relatively high financial leverage post Celesio, its entry into new, highly regulated and competitive geographies, as well as retail pharmacy ownership. However, the outlook also incorporates Moody's expectation that the company is committed to deleveraging through both EBITDA improvements and debt repayment over the next few years.
If the company is not able to deleverage because it experiences lower than expected profitability or cash flows or it engages in additional acquisitions or buybacks, the ratings could be downgraded. If McKesson's deleveraging does not result in debt/EBITDA that approaches 2.5 times in the next 12-18 months, ratings could be downgraded. Though not anticipated in the near future, the ratings could be upgraded if McKesson is able to raise margins by realizing synergies, improving retail operations and by overcoming any regulatory constraints. Debt/EBITDA sustained below 1.75 times could support an upgrade.
The principal methodology used in this rating was the Global Distribution & Supply Chain Services published in November 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Serious News for Serious Traders! Try StreetInsider.com Premium Free!
You May Also Be Interested In
- Paramount Global (PARA) and Skydance are closer to a merger - CNBC
- MGIC Investment (MTG) Announces $750M Share Buyback, Declares $0.115 Dividend
- Immunome Inc. (IMNM) Appoints Sandra M. Swain to its Board
Create E-mail Alert Related Categories
Credit RatingsRelated Entities
Moody's Investors Service, Definitive AgreementSign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
