Standard & Poor’s Ratings Services said Tuesday it lowered its corporate credit and senior unsecured debt ratings on Woonsocket-based chain drug retailer CVS Corp. to ‘BBB+’ from ‘A-‘.
At the same, Standard & Poor’s affirmed the ‘A-2’ short-term rating on CVS. The corporate credit and senior unsecured debt ratings are removed from CreditWatch, where they were placed on Jan. 23, with negative implications. The outlook is stable.
“The downgrade reflects CVS’ increased leverage due to its planned
debt-financed acquisition of 700 stores under the Sav-on and Osco banners from
Albertson’s and its aggressive financial policy,” said Standard & Poor’s
credit analyst Diane Shand.
Although the pending transaction strengthens CVS’ competitive position, the $2.9 billion of additional debt to fund the acquisition weakens the company’s financial profile. Pro forma for the transaction, total debt to total capital for 2005 rises to 67 percent from 60 percent. Cash flow protection measures also deteriorate due to the combination of higher interest expense and integration costs.
The acquisition also represents a more aggressive financial policy as the
company has undertaken two large acquisitions in two years. Still, Standard &
Poor’s believes there is minimal integration risk related to the transaction
because the Sav-on and Osco stores are in relatively good shape in favorable
locations, and CVS has experience integrating acquisitions. The
acquisition will add to CVS’ presence in the southern California market, and give it a greater lead in terms of locations.
Walgreen Co., CVS’ closest competitor, currently has 5,156 units. The next largest drugstore chain is Rite Aid with 3,323.
The ratings reflect CVS’ solid position in the favorably regarded drugstore industry and its generally good operating performance, S&P said.
CVS, with almost 6,500 units (pro forma for the Albertson’s drug store acquisition), is the largest chain drug retailer in the country, based on store count.
