Fitch: Event Risk Remains Heightened Following McKesson's Failed Bid for Celesio

Fitch Ratings thinks event risk remains heightened following the failed tender offer by McKesson Corp. (McKesson) for Celesio AG (Celesio). Consequently, McKesson's long-term ratings remain on Rating Watch Negative.

McKesson was unsuccessful in securing the 75% of outstanding shares and convertible bonds necessary under German law to move forward with its intended $8.5 billion acquisition of Celesio. German law generally restricts the renewal of a failed tender offer, so Fitch does not expect a re-launch of a like-structured transaction. Management has stated publicly that McKesson and Celesio have discussed various alternatives to an outright acquisition, though the ultimate method of business combination, if any, is at this time uncertain.

The Negative Rating Watch will be resolved once it becomes more clear which path McKesson will take following the failed tender offer. Fitch believes McKesson will remain committed to maintaining strong investment grade ratings, supported by strong and consistent cash generation, stable operations with appropriately low margins, and a solid liquidity profile. A transaction that causes debt leverage to be maintained above 1.4x for an extended period of time could drive a downgrade of McKesson's ratings. Fitch thinks it is unlikely that a downgrade of more than one notch would result from a potential deal with Celesio. In lieu of a cash acquisition, Fitch expects McKesson to direct cash toward share repurchases.

Fitch sees the European drug channel as somewhat less stable and higher risk than that found in the U.S. But the combination of McKesson and Celesio is compelling, in Fitch's view, due to the benefits of scale it could offer. Greater scale is increasingly important for drug channel participants; for McKesson, particularly as it relates to the purchasing of generic pharmaceuticals and expansion in emerging markets like Brazil.

Fitch does not rate Celesio, and currently rates McKesson as follows:

-- Long-term Issuer Default Rating (IDR) 'A-';

-- Unsecured bank facility 'A-';

-- Unsecured senior notes 'A-';

-- Short-term IDR 'F2';

-- Commercial paper 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Healthcare Stats Quarterly - Third-Quarter 2013' (Jan. 2, 2014);

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);

--'Trekking the Path to Biosimilars - The Destination' (Oct. 4, 2013);

--'U.S. Healthcare Stats Quarterly - Second-Quarter 2013' (Sept. 26, 2013);

--'Vital Signs - Currents in the Drug Channel' (Podcast) (April 25, 2013);

--'Navigating the Drug Channel - Drug Distributors: A Deeper Dive' (April 24, 2013).

Applicable Criteria and Related Research:

U.S. Healthcare Stats Quarterly - Third-Quarter 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726356

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Trekking the Path to Biosimilars -- The Destination

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719802

U.S. Healthcare Stats Quarterly - Second-Quarter 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717635

Vital Signs -- Currents in the Drug Channel

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707243

Navigating the Drug Channel -- Drug Distributors: A Deeper Dive

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706690

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