March 19 (The following statement was released by the rating agency)
The announced long-term strategic agreement among
AmerisourceBergen Corp. (ABC), Walgreen Co. (Walgreens), and Alliance Boots GmbH
(Alliance Boots) is likely positive for ABC, according to Fitch Ratings. The
agreement has no immediate impact on ABC's current 'A-' ratings.
A complete list of ABC's ratings is provided at the end of this release. The
Rating Outlook is Stable.
Fitch expects ABC to remain committed to operating within its current 'A-'
ratings. Maintenance of an 'A-' Issuer Default Rating (IDR) will require
debt-to-EBITDA generally maintained at or below 1.2x, accompanied by strong and
steady cash generation. Fitch believes ABC remains committed to maintaining its
current credit ratings.
ABC has ample flexibility at its current ratings, but Fitch notes that free cash
flow will likely be strained near the end of ABC's fiscal 2013 due to the
significant working capital ramp-up necessary to on-board the new Walgreens
business. Furthermore, EBITDA margins are likely to show some compression in
ABC's fiscal 2013 and 2014, as discussed below. It is unlikely that this margin
compression and cash flow pressure will result in a negative rating action.
ABC's long-term relationship with Walgreens and Alliance Boots includes
provisions for the following:
-- Increased generics purchasing scale through the addition of ABC to Walgreens'
and Alliance Boots' generic purchasing joint venture;
-- A 10-year exclusive contract between ABC and Walgreens for the distribution
of branded, generic, and specialty pharmaceuticals in the U.S.;
-- The opportunity for Walgreens to own up to 30% of ABC's outstanding stock
over the next several years through a combination of possible warrant exercises
and open-market share purchases.
IMPROVED GENERIC PURCHASING DYNAMICS
Fitch expects the greatest benefit to ABC will be derived from improved generics
purchasing dynamics. ABC will join Walgreens Boots Alliance Development GmbH,
which is a generic procurement joint venture created by Walgreens and Alliance
Boots. The combined scale of the three entities should enable ABC to achieve
improved generic pricing, translating into improved profit margins on the sale
of generic drugs, particularly to its non-Walgreens customers.
As it pertains to generic drug procurement, Fitch believes that the buy-side
margin improvement represented by this new relationship is likely to offset any
potential sell-side margin pressure over the ratings horizon.
MARGIN COMPRESSION EXPECTED FROM UNIQUE DISTRIBUTION CONTRACT
The nearly $30 billion of new Walgreens business will add materially to ABC's
top-line and overall profits over the course of its fiscal 2014 and beyond. As
the exclusive distributor of pharmaceuticals to Walgreens' U.S. retail
drugstores, mail-order facilities, and specialty pharmacies, ABC will be able to
leverage the fixed costs associated with drug distribution and retain certain
profits related to the distribution of generic drugs to Walgreens.
It is noteworthy that Walgreens, the largest retail pharmacy chain in the U.S.,
has decided to source generic and specialty pharmaceuticals through ABC. Each of
the largest retail and mail-order pharmacies - and some mass merchandisers with
pharmacy operations - currently source and distribute most generic and specialty
products on their own.
Though the specifics of the distribution contract are unknown, Fitch expects
EBITDA margins to show some compression in ABC's fiscal 2013 and 2014. This
expectation is based on the low-margin nature of distributing branded drugs to a
customer as large as Walgreens, as well as to the incremental variable costs
associated therewith. Nevertheless, cash flows are expected to increase
materially beginning in ABC's fiscal 2014. Cash flows in fiscal 2013 will be
pressured by a significantly negative working capital swing near the end of
ABC's fiscal 2013 in anticipation of the new Walgreens business, which will take
effect Sept. 1, 2013.
Fitch acknowledges the potential for some loss of business as a result of ABC's
alignment with Walgreens, especially among its other pharmacy customers.
However, Fitch does not expect this risk to be materially negative to ABC's
overall credit profile.
FUTURE PARTNERSHIPS AND INTERNATIONAL EXPANSION
ABC has voiced its interest in expanding its presence in non-U.S. markets,
especially as it pertains to specialty drug distribution and manufacturer
service offerings. This new relationship, coupled with ABC's market-leading
position in U.S. specialty drug distribution and recent expansion in other
service-oriented businesses, further empowers ABC to achieve this goal in the
intermediate term through possible collaborations with Alliance Boots.
ABC has a long history of demonstrated conservative financial management, and
Fitch continues to expect that ABC will be responsible and measured in its
international expansion ambitions.
WALGREENS OWNERSHIP COULD HAVE LONGER-TERM IMPLICATIONS
The new relationship will grant Walgreens the right to own as much as 30% of ABC
over the next several years. Future ownership in excess of the terms announced
could weigh on ABC's credit profile. However, Fitch does not view this facet of
the agreement as a current credit negative and acknowledges that its specifics
are likely outside the current ratings horizon. Fitch further expects that ABC
will be able to finance any hedges it may enter into in conjunction with the
warrants ABC has issued to Walgreens in a manner consistent with its current
Fitch currently rates ABC as follows:
--Long-term Issuer Default Rating (IDR) A-';
--Short-term IDR 'F2';
--Senior unsecured bank facility rating 'A-';
--Senior unsecured notes 'A-';
--Commercial paper 'F2'.
The Rating Outlook is Stable.