Business Context and Reporting Period
Company: McKesson Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: June 28, 2016
Event: Entry into a Material Definitive Agreement (Contribution Agreement and Debt Financing).
On June 28, 2016, McKesson Corporation entered into an Agreement of Contribution and Sale to combine its Core Technology Solutions business (excluding Enterprise Information Solutions and RelayHealth Pharmacy Network) with Change Healthcare's business (excluding pharmacy claims switching and prescription routing). The transaction creates a new entity, PF2 NewCo LLC ("NewCo"), a leading healthcare information technology company.
Key Financial Metrics and Transaction Structure
Equity Ownership:
- McKesson: 70% of NewCo equity interests (Units).
- Change Healthcare Stockholders (via Echo): 30% of NewCo equity interests (Units).
Cash Consideration and Debt:
- McKesson Note Payment: NewCo assumes a promissory note of $1.25 billion payable to McKesson at Closing (subject to adjustments).
- Change Healthcare Cash Payment: NewCo pays $1.75 billion to Change Healthcare Stockholders at Closing (subject to adjustments).
- Debt Financing: NewCo secured commitments for $6.1 billion in long-term funded debt and a $500 million revolving credit facility.
Adjustments: Closing cash consideration is subject to adjustments based on transaction expenses, working capital, net debt, and Core MTS Adjusted EBITDA targets. Adjustments under $125 million are deferred; excess amounts are settled at Closing.
Material Changes and Transaction Conditions
The transaction represents a significant strategic shift, spinning off a major technology segment into a joint venture. The consummation of the transaction is subject to several closing conditions, including:
- Receipt of required competition approvals (Hart-Scott-Rodino and European Union).
- Receipt of proceeds from the committed debt financing.
- Delivery of audited financial statements for the Core MTS Business for fiscal years ended March 31, 2015 and 2016.
- Separation of Change Healthcare's pharmacy claims switching and prescription routing businesses.
- Absence of any law or injunction prohibiting the Closing.
The agreement may be terminated if the Closing is not consummated by June 28, 2017, or under specific tax law change scenarios.
Outlook, Governance, and Exit Strategy
Management and Governance:
NewCo will be governed by a 10-member Board of Directors. McKesson and Echo will each designate up to four directors. John H. Hammergren (McKesson CEO) is expected to serve as Chairman, and Neil de Crescenzo (Change Healthcare CEO) is expected to serve as NewCo CEO.
Exit Strategy (Qualified IPO):
The parties agree to use reasonable best efforts to consummate a Qualified Initial Public Offering (IPO) of the Echo Member within 18 months of Closing. If not consummated within 24 months, either party may demand an IPO within the subsequent six months.
McKesson Exit Window:
Following the IPO and underwriter lock-up periods, McKesson has a window (up to 12 months) to conduct a "Qualified McK Exit," expected to be a spin-off or split-off followed by a merger with the public company (PubCo).
Tax Receivable Agreements:
- McK Tax Receivable Agreement: NewCo will pay McKesson 85% of net cash tax savings realized from certain tax attributes (e.g., amortizable tax basis in IP).
- New Echo Tax Receivable Agreement: Change Healthcare will pay Change Healthcare Stockholders 85% of net cash tax savings from net operating losses and other attributes.
Investor Verification Checklist
- Regulatory Approval Status: Verify the expiration of the HSR waiting period and receipt of EU competition approval.
- Debt Financing Closing: Confirm the finalization of the $6.1 billion debt commitment and $500 million credit facility.
- EBITDA Adjustments: Monitor the audited Core MTS financial statements to determine if the Adjusted EBITDA target is met, which affects the $1.25 billion note payment and $1.75 billion cash payment.
- Separation of Excluded Businesses: Confirm the successful separation of Change Healthcare's pharmacy claims switching and prescription routing businesses.
- Tax Opinion Validity: Ensure no changes in tax law prevent the rendering of a favorable tax opinion regarding the tax-free nature of the transfers.