On February 10, 2020 McKesson Corporation (NYSE:MCK) reported the commencement of an exchange offer for the split-off of its wholly-owned subsidiary, PF2 SpinCo, Inc. ("SpinCo"), which will hold all of McKesson’s interest in Change Healthcare LLC ("Change Healthcare"), as part of McKesson’s previously announced agreement with Change Healthcare Inc. (Nasdaq:CHNG) ("Change") to merge SpinCo with and into Change (Press release, McKesson, FEB 10, 2020, View Source [SID1234554103]).
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"We are very pleased to launch the split-off of our investment in Change Healthcare. We have concluded that now is the appropriate time to distribute our remaining stake in Change Healthcare," said Brian Tyler, chief executive officer, McKesson. "We expect this exchange offer will continue to deliver value to McKesson shareholders by reducing our number of outstanding shares in a tax-efficient manner. This transaction better positions McKesson to focus on our core business and signifies another important step in McKesson’s transformation to become a simpler, more focused organization."
The exchange offer represents the next step in McKesson’s planned exit from its investment in Change Healthcare, which will be effected through a "Reverse Morris Trust" transaction. In the exchange offer, McKesson stockholders will have the opportunity to exchange their shares of McKesson common stock for shares of SpinCo common stock, which will be immediately converted into an equal number of shares of Change common stock upon completion of the proposed merger, in each case subject to certain customary terms and conditions. The exchange offer and merger are generally expected to be tax-free to participating McKesson stockholders for U.S. federal income tax purposes except to the extent of any cash received in lieu of fractional shares of Change common stock.
Details of the Exchange Offer:
Holders of McKesson common stock will have the opportunity to exchange some or all of their shares for SpinCo common stock at a 7.0% discount per-share value, subject to an upper limit (as described below).
The discount means that tendering stockholders are expected to receive approximately $107.53 of SpinCo common stock for every $100 of McKesson common stock tendered and accepted in the exchange offer.
The number of shares a McKesson stockholder can receive in the exchange offer is subject to an upper limit of 11.4086 shares of SpinCo common stock for each share of McKesson common stock tendered and accepted in the exchange offer.
If the upper limit is in effect, then the exchange ratio will be fixed at that limit and tendering stockholders will receive less than $107.53 of SpinCo stock for each $100 of McKesson common stock.
McKesson will offer 175,995,192 shares of SpinCo common stock in the exchange offer. The number of shares of McKesson common stock that will be accepted in the exchange offer will depend on the final exchange ratio, the number of shares of McKesson common stock tendered and whether the upper limit is in effect.
SpinCo common stock will not be transferred to participating stockholders following the exchange offer. Such participants will instead receive shares of Change common stock in the merger immediately following the completion of the exchange offer. No trading market currently exists or will exist for shares of SpinCo common stock.
The exchange offer is scheduled to expire at 11:59 p.m., New York City time, on March 9, 2020, unless the exchange offer is extended or terminated.
Holders of McKesson common stock may withdraw their tendered shares at any time before the expiration date of the exchange offer.
Participants in the McKesson Corporation 401(k) Retirement Savings Plan (the "McKesson 401(k) Plan") will receive special directions from the plan administrator of the McKesson 401(k) Plan and to allow sufficient time for the tender of shares by the trustee of the McKesson 401(k) Plan, plan participants must provide the requisite instructions as directed by 4:00 p.m., New York City time, on March 3, 2020, unless the exchange offer is extended or terminated.
Subject to the upper limit, the final exchange ratio used to determine the number of shares of SpinCo common stock that participating stockholders will receive for each share of McKesson common stock accepted in the exchange offer will be calculated by McKesson by reference to the simple arithmetic average of the daily volume–weighted average prices, on each of the three Valuation Dates (as defined below), of McKesson common stock and Change common stock on the New York Stock Exchange and The Nasdaq Global Select Market, respectively, during a period of three consecutive trading days (the "Valuation Dates") ending on and including the second trading day preceding the expiration date of the exchange offer. Based on an expiration date of March 9, 2020, the Valuation Dates are expected to be March 3, March 4 and March 5, 2020. Unless the exchange offer is extended or terminated, the final exchange ratio will be announced in a press release no later than 11:59 p.m., New York City time, on March 5, 2020, and the exchange offer will expire at 11:59 p.m., New York City time, on March 9, 2020, leaving two trading days between the date that the final exchange ratio is announced and the expiration of the exchange offer.
The final exchange ratio, as well as a daily indicative exchange ratio beginning at the end of the third day of the exchange offer period, will also be available at www.dfking.com/McKesson.
Immediately following the completion of the exchange offer, SpinCo will merge with and into Change, whereby the separate corporate existence of SpinCo will cease and Change will continue as the surviving company. In the merger, each share of SpinCo common stock will be converted into one share of Change common stock. Change will issue 175,995,192 shares of Change common stock in the merger.
The exchange offer will be subject to proration if the exchange offer is oversubscribed, and the number of shares accepted in the exchange offer may be fewer than the number of shares tendered.
If the exchange offer is consummated but not fully subscribed, or if the upper limit is in effect and not all of the shares of SpinCo common stock owned by McKesson are distributed pursuant to the exchange offer, the remaining shares of SpinCo common stock owned by McKesson will be distributed in a spin-off on a pro rata basis to McKesson stockholders whose McKesson common stock remains outstanding after the consummation of the exchange offer.
The transaction is subject to customary closing conditions, including required regulatory approvals. Change’s board of directors previously approved the Merger and the Merger Agreement prior to the execution of the Merger Agreement on December 20, 2016. On January 17, 2017, the stockholders of Change approved the Merger, the Merger Agreement and the transactions contemplated thereby.
Upon completion of the merger, approximately 51 percent of the outstanding shares of Change common stock are expected to be held by pre-merger holders of McKesson common stock, and approximately 49 percent of the outstanding shares of Change common stock are expected to be held by pre-merger holders of Change common stock.
The terms and conditions of the exchange offer are more fully described in a registration statement on Form S-4 and Form S-1, including a prospectus forming a part thereof, filed by SpinCo with the U.S. Securities and Exchange Commission (the "SEC") today and a tender offer statement on Schedule TO filed by McKesson with the SEC today.
For more information about the exchange offer, please visit www.dfking.com/McKesson or contact the information agent, D.F. King & Co., at 1-866-304-5477 (toll-free in the United States) and 1-212-269-5550 (outside of the United States).
In connection with the transactions, Goldman Sachs & Co. LLC is acting as financial advisor and Davis Polk & Wardwell LLP is acting as legal advisor to McKesson.