Health & Fitness
Health and Fitness
Health and Fitness
Tue, July 26, 2011
Mon, July 25, 2011 Fitch Places Express Scripts' IDR on Rating Watch Negative
CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has placed Express Scripts' (NYSE: ESRX) Issuer Default Rating (IDR) on Rating Watch Negative following the company's announcement that it has entered into an agreement to acquire Medco Health Solutions (NYSE: MHS) for approximately $29.1 billion (40% cash/60% stock). ESRX expects the transaction to close in the first half of 2012. Simultaneously, the ratings associated with MHS were also placed on Rating Watch Negative with this announcement.
RATING RATIONALE:
The Negative Watch recognizes the likely increase in leverage required to complete the transaction. Fitch estimates that ESRX will require an additional $8-$10 billion of additional debt and leverage (total debt/EBITDA) of 2.7 times (x) to 2.9x (including the assumption of MHS' debt) to satisfy the cash component of the deal. However, Fitch believes ESRX could significantly reduce leverage in the 18 months following the close of the transaction. Fitch expects to resolve the Watch once it has a better sense of the combined company's capital structure and the requisite regulatory approvals have been obtained or denied. A one-notch downgrade is likely if the acquisition is completed.
KEY RATING DRIVERS:
The key rating drivers for this credit are leverage measured as total debt-to-EBITDA, EBITDA margins and free cash flow. The 'BBB' leverage range for this credit is approximately 1.5x-2.0x. Margin variability of less than 90 basis points and material free cash flow generation are expected for this rating.
STRATEGICALLY SOUND:
Fitch believes the business combination is strategically sound, as it creates significant synergies, bringing together a focus on behavioral economics and optimal drug therapy protocols. ESRX's stated $1 billion of synergies are achievable, given the similar nature of both companies' operations and the company's success with integrating past acquisitions. Nevertheless, the proposed acquisition is ESRX's largest ever, and as such, it presents integration risk.
ANTITRUST CONCERNS:
Combining two of the three largest Pharmacy Benefit Managers (PBMs) may raise antitrust issues. Fitch believes that if the Federal Trade Commission (FTC) considers the broader U.S. prescription dispensing market (including standalone PBMs, captive PBMs, and retail drug stores) and the PBM business model alignment with moderating drug costs for payers and patients, the proposed merger can pass regulatory muster. ESRX does have the flexibility to divest some business should the FTC require if for approval, although regulatory risk is present.
RELATIVELY STABLE OPERATIONS FOR 2011:
The integration of NextRx is complete, and ESRX expects to generate more than $1 billion of EBITDA from the acquired business in 2011. Incorporating Fitch's expectations of moderate organic growth, relatively stable margins and solid working capital management, free cash flow during 2011 is forecast to range from $2 billion to $2.2 billion. Fitch expects ESRX will operate with leverage between 1.4x-1.7x during 2011.
ADEQUATE LIQUIDITY:
ESRX generated roughly $1.5 billion in free cash flow during the latest 12 months ending March 31, 2011 and ended with the period with approximately $766 million in cash/short-term investments. ESRX had no borrowings against its $750 million revolving credit facility, which matures in August 2013. At March 31, 2011, the company had $2.5 billion in debt with approximately $1 billion maturing in 2012, $1 billion in 2014, and $500 million in 2019. In April 2011, the company issued $1.5 billion in notes that mature in 2016.
CURRENT RATINGS:
Fitch has placed the following ratings for ESRX on Rating Watch Negative:
--IDR 'BBB';
--Senior unsecured bank credit facility 'BBB';
--Senior unsecured notes 'BBB'.
Additional information is available at '[ www.fitchratings.com ]'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Amended
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
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