TEXT-Fitch revises Ingram Micro outlook to negative
July 19 - In response to Ingram Micro Inc.'s (Ingram Micro) announcement that it will acquire Brightpoint Inc. (Brightpoint), Fitch has affirmed Ingram Micro's ratings as follows: --Issuer Default Rating (IDR) at 'BBB-'; --$300 million senior unsecured notes at 'BBB-'; --$750 million senior unsecured credit facility at 'BBB-'. The Rating Outlook has been revised to Negative from Stable. Fitch believes Ingram Micro's proposed acquisition of Brightpoint carries several financial and operational risks which factor in to the Negative Outlook including the following: --Significant exposure to troubled handset makers Nokia and RIM (together representing 47% of all devices distributed in fiscal 2011) in the company's distribution business. Fitch believes this exposure coupled with a significant increase in inventory at Brightpoint over the past few quarters could lead to inventory writedowns and margin compression in the future; --Fitch views market share consolidation by Apple and Samsung in the handset market as potentially having a material negative impact on Brightpoint's distribution business going forward which could lead to additional margin pressure; --Significant customer exposure to Sprint, Metro PCS and T-Mobile in Brightpoint's logistics business, all three of which have been rumored to be potential acquisition targets and could cease to be customers if acquired; --This is Ingram Micro's largest acquisition to date and Fitch believes management could easily be distracted from its core business if it needs to address trouble at Brightpoint post-acquisition. In addition to concerns about Brightpoint's business, Ingram Micro's razor-thin margins in the face of significant competitive pricing pressure and recent difficulties in managing the rollout of its global enterprise resources planning (ERP) system remain concerns for Fitch. In December, Fitch cited concerns for Ingram Micro around increased operating expenses from running duplicate systems for the foreseeable future, as well as balancing pricing strategies that preserve market share and gross margin levels. Fitch believes that Ingram Micro's ratings could be downgraded if Brightpoint's logistics business does not demonstrate meaningful EBITDA growth, coupled with a realization of Fitch's concern for a decline in the company's distribution business. While Ingram Micro's credit metrics may not be significantly altered by an erosion in the Brightpoint business post-acquisition close, Fitch believes that the company's investment-grade credit profile cannot withstand anything less than a successful acquisition of this size. Ingram Micro plans to fund the $840 million acquisition with a combination of cash, long-term debt, and draws on its existing credit facilities. Fitch believes Ingram Micro will convert its recently announced 364-day $300 million bridge term loan facility used in the acquisition into long-term debt. The remaining $540 million acquisition funding will be split among existing cash as well as utilization of Ingram Micro's revolving credit facilities and A/R securitization facilities. These facilities had a total of roughly $1.7 billion in committed capacity as of March 2012. Cash and cash equivalents totaled $991 million as of March 2012. Pro forma of the acquisition, Fitch estimates total leverage (total debt to EBITDA) will be roughly 1.5x, and long-term debt leverage (long-term debt to EBITDA) will be roughly 1.0x. Free cash flow is expected to exceed $300 million in fiscal 2012. Fitch expects total leverage at Ingram Micro to remain below 2.0x and for long-term debt to EBITDA to remain at or below 1.0x going forward. Fitch believes that the higher total leverage figure reflects the company's need to finance working capital with short-term debt, allowing it to reduce leverage in a business downturn. Ratings strengths include: --Ingram Micro's scale of operations including its global footprint, financial capability and breadth of product offering, which provides a competitive advantage and a moderate barrier to entry; --Importance of the wholesale distribution model for original equipment manufacturers (OEMs), particularly for serving the small-to-medium business (SMB) market. Rating concerns continue to center on: --Exposure to the cyclicality of IT demand and general global economic conditions; --Potential for the use of free cash flow and/or debt issuance for acquisitions or for shareholder-friendly actions; --Low-margin and high working capital nature of the wholesale distribution model which can lead to volatility in profitability and free cash flow, although working capital has historically provided a substantial source of liquidity during cyclical downturns. Liquidity was solid as of March 31, 2012 and consisted primarily of $991 million in cash and cash equivalents, an undrawn $750 million senior unsecured revolving credit facility expiring August 2016 (with $5 million of letters of credit outstanding), and approximately $1 billion of capacity under various accounts receivable securitization programs. These receivable facilities include a $500 million U.S. facility that expires in April 2014 as well as several smaller facilities in Europe and Asia. Available capacity under these agreements can vary moderately based upon the amount of eligible Trade Accounts Receivable held by the company at any point in time. Ingram Micro also has several additional credit facilities it utilizes for liquidity purposes with aggregate capacity of approximately $736 million, of which $623 million was available to the company after deducting $25 million of letters of credit outstanding. Total debt as of March 31, 2012 was approximately $388 million and consisted principally of $88 million outstanding under various uncommitted revolving credit facilities, and $300 million senior unsecured notes maturing in 2017. In addition, Ingram Micro has $140 million outstanding under various uncommitted off-balance sheet accounts receivable sales agreements which Fitch includes in its adjusted debt calculations. WHAT COULD TRIGGER A RATING ACTION Future developments that may, individually or collectively, lead to negative rating action include: --An inability to grow Brightpoint's logistics business to offset expected weakness in its distribution business; --Overall operating margin compression at Ingam Micro due to competitive threats or execution missteps; Future developments that may, individually or collectively, lead to positive rating action include:: --The current Rating Outlook is Negative. As a result, Fitch does not currently anticipate developments with a material likelihood, individually or collectively, leading to a rating upgrade. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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