October 25, 2012 / 9:20 PM / 5 years ago

TEXT-Fitch: McKesson ratings initially unchanged by PSS World announcement

Oct 25 - 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.
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