Fitch Affirms Owens & Minor Inc.'s Credit Ratings.

CHICAGO -- Fitch Ratings has affirmed the following ratings for Owens & Minor Inc. (OMI):

--Issuer Default Rating 'BBB-'

--Senior Unsecured Credit Facility 'BBB-'

--Senior Unsecured Debt 'BBB-'

The ratings apply to approximately $200 million of debt. The Outlook is Stable.

Fitch's affirmation follows OMI's announcement that it will acquire McKesson's (MCK) medical-surgical distribution business that services acute-care customers for approximately $170 million in cash. The transaction will be financed with cash on hand and borrowings from OMI's revolving credit facility. OMI will acquire roughly $128 million in inventory, MCK's acute-care sales force and twelve distribution centers. Fitch expects free cash flow to pay down the revolver borrowings within two years.

The acquisition eliminates a smaller competitor and increases OMI's economies of scale. As such, some margin expansion could be gained from the transaction. MCK's business should also expand OMI's geographic presence in upstate New York, Chicago and New Mexico. As such, Fitch believes the acquisition is strategically sound.

While Fitch expects leverage at year-end 2006 should increase to approximately 2.0 times (x), OMI's credit profile (moderate leverage and good coverage); strong market position; manageable CAPEX requirements; and ability to generate decent free cash flow support a 'BBB-' rating on its IDR.

The ratings also reflect the firm's established track record of improving its financial profile, including preservation of margins during a period of pricing pressure. OMI has good cash flow relative to its size and manageable capital requirements.

As with many segments of health care, cost pressures could threaten margins. OMI seeks to position itself to maintain its margins through offering programs to customers, which allow it to be compensated for value-added services. Nevertheless, Fitch will continue to monitor for any margin erosion in the sector, as well as in OMI's business.

OMI maintains a dividend policy that is significantly more generous than its peers. However, its share repurchases remain conservative. Fitch continues to expect that targeted acquisitions could be funded, in part, by cash on hand and free cash flow (cash flow from operations minus capital expenditures minus cash dividends). However, larger acquisitions would likely require the assumption of additional debt.

OMI generated negative free cash flow of roughly $17.4 million for the latest twelve months (LTM) ending March 31, 2006. However, Fitch expects OMI to generate positive free cash flow going forward. OMI has manageable capital expenditure requirements.

At March 31, 2006, OMI had approximately $72 million in cash, $250 million availability (offset by $12.2 million in letters of credit) under a $250 million revolver that expires in 2011, and no debt maturing in the near term. At March 31, 2006, latest twelve months (LTM) interest coverage (EBITDA/interest) was 10.8x and leverage (total debt/EBITDA) was 1.5x or (Adjusted Debt/FFO) was 3.2x.

Owens & Minor Inc. is a leading distributor of medical/surgical products to hospitals and other health care provider organizations.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.