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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has assigned a 'BBB' rating to Express Scripts' (NYSE: ESRX) proposed senior unsecured notes issuance. The net proceeds from the issuance are expected be used to prefund, in part, the anticipated acquisition of Medco Health Solutions, Inc. (NYSE: MHS). If the acquisition is not completed, ESRX must redeem the notes at 101% of par. Fitch maintains ESRX's 'BBB' ratings on Rating Watch Negative. A complete list of ESRX's ratings can be found at the end of this press release.

The ratings reflect the following key factors:

--Fitch believes the proposed acquisition is strategically sound, fits within ESRX's core competencies, offers a portfolio of complimentary ancillary services, and provides potential for gains in efficiencies of scale.

--Pro forma and reported leverage are expected to remain above levels generally indicative of its 'BBB' credit rating for 12-18 months following the closing of the transaction.

--ESRX has established a history of leveraging acquisitions, followed by successful integration and rapid de-leveraging through debt pay downs with its solid free cash flow generation.

--The regulatory approval process by the U.S. Federal Trade Commission (FTC) will likely be challenging and lengthy, which could affect the combined company's ability to realize its targeted synergies and add to financing costs.

Negative Watch Reflects Expected Leverage & Synergies:

The Negative Watch recognizes the expected increase in leverage required to complete the transaction. Fitch estimates that ESRX will require an additional $11-$12 billion of additional debt and pro forma leverage (total debt/EBITDA) of 2.9 times (x) - 3.1x (including the assumption of MHS' debt) to satisfy the cash component of the deal. In order to maintain its 'BBB' ratings, ESRX will need to reduce leverage below 2.0x within 18 months of the transaction's close. In addition, the Negative Watch incorporates the risk of ESRX achieving its stated synergies, particularly relating to the FTC's decision and the timing of that decision. Fitch will resolve the watch, once it can more confidently forecast how ESRX will deliver on regulatory approvals, synergies and debt/leverage reduction.

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 compression of less than 100 basis points and material free cash flow generation are expected for this rating. In addition, Fitch expects that ESRX will pursue a strategically sound acquisition policy, focusing on targets that have business models aligned with ESRX's core competencies or provide business adjacencies. This is of particular importance in light of the fact that U.S. prescription growth has slowed during the past two years.

Transaction:

In July 2011, ESRX entered into an agreement to acquire MHS for approximately $29.1 billion (40% cash/60% stock). ESRX expects the transaction to close in the first half of 2012. The acquisition will nearly double ESRX's free cash flow and significantly increase the mix of mail-order pharmacy services.

Strategically Sound:

Fitch views the business combination as strategically sound, given the anticipation of significant synergies and the combining of behavioral economics and the optimization of drug therapy protocols. ESRX's stated that $1 billion of net synergies are achievable, given the similar nature of both companies' operations. In addition, ESRX has a demonstrable record of successfully integrating acquisitions and quickly reducing leverage following the transactions. Examples include its acquisitions of NextRx in 2009 and Priority Health in 2005. Nevertheless, the proposed acquisition of MHS is large and carries integration risk.

Antitrust Concerns:

Combining two of the three largest Pharmacy Benefit Managers (PBMs) will raise antitrust concerns. 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 has some flexibility to divest some business should the FTC require it for approval. Nevertheless, regulatory risk relating to the proposed transaction remains, given that costs could increase and synergies could become more difficult to achieve if the FTC significantly delays its decision or if it requires material concessions.

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 forecasted 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 $1.8 billion in free cash flow during the latest 12 months ending Sept. 30, 2011 and ended with the period with approximately $1.1 billion in cash/short-term investments. ESRX had no borrowings against its $750 million revolving credit facility, which matures in August 2013. At Sept. 30, 2011, the company had roughly $4 billion in debt with approximately $1 billion maturing in 2012, $1 billion in 2014, $1.5 billion in 2016, and $500 million in 2019.

Fitch maintains the following ratings for ESRX on Rating Watch Negative:

--Issuer Default Rating 'BBB';

--Senior unsecured bank credit facility 'BBB';

--Senior unsecured notes 'BBB'.

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]

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