Fitch: Walgreens Deal Likely Positive for AmerisourceBergen; No Immediate
CHICAGO -- March 19, 2013
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
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
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 'A-' ratings.
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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 9, 2012);
--'Navigating the Drug Channel - The ABCs (and Ds) of Drug Pricing' (July 25,
--'Navigating the Drug Channel - Drug Distributors: A Deeper Dive' (March 13,
Applicable Criteria and Related Research
Navigating the Drug Channel -- Drug Distributors: A Deeper Dive
Navigating the Drug Channel -- The ABCs (and Ds) of Drug Pricing
Short-Term Ratings Criteria for Non-Financial Corporates
Corporate Rating Methodology
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ON THE FITCH WEBSITE.
Jacob Bostwick, CPA
70 W. Madison Street
Chicago, IL 60602
Bob Kirby, CFA
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