Fitch Places Life Technologies' Ratings on Negative Watch

Mon Apr 15, 2013 5:06pm EDT

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(The following statement was released by the rating agency) NEW YORK, April 15 (Fitch) Fitch Ratings has removed the ratings of Life Technologies Corp (Life Tech), including the 'BBB' Issuer Default Rating (IDR), from Rating Watch Evolving and placed them on Rating Watch Negative. The action follows Thermo Fisher Scientific Inc.'s (Thermo Fisher) announcement that it plans to acquire Life Tech. The ratings apply to approximately $2.2 billion of debt outstanding at Dec. 31, 2012. Key Rating Drivers: Fitch expects that Life Tech's outstanding senior unsecured notes net of cash on hand will be assumed by Thermo Fisher upon the closing of the acquisition. Fitch has placed Thermo Fisher's 'BBB+' IDR on Negative Watch, since the funding of the transaction is expected to pressure the company's credit profile, likely resulting in a downgrade of the ratings. There are several issues about which a limited amount is currently known that will influence the post-acquisition credit profile, including: --The amount of debt used to fund the transaction. Fitch expects Thermo Fisher will use a combination of debt and proceeds from equity issuance. --The pricing of the debt used to fund the acquisition, which will effect interest coverage levels and free cash flow (FCF) generation of the combined company. --Fitch's view of the operational risk inherent in the integration of a company the size of Life Tech. --Any potential upside to financial results to be realized through synergies. --Thermo Fisher's plans to apply cash to debt reduction in the 12-18 months post the transaction. Rating Sensitivities: All series of Life Tech's senior unsecured notes include an offer to purchase at 101% upon a change of control event and a subsequent downgrade to non-investment grade, providing some protection for bondholders. However, Fitch believes that Thermo Fisher is committed to maintaining investment grade ratings and expects the transaction to be funded in a manner to maintain at least a 'BBB-' rating, This would be consistent with debt for the combined company of around 3.5x EBITDA within 18 months following the transaction. Based on a preliminary analysis of the transaction, assuming that Thermo Fisher funds a portion of the purchase price with proceeds of equity issuance and is aggressive in reducing debt through FCF, Fitch thinks that an affirmation of the 'BBB' rating on Life Tech's notes is a possibility. If there is a reasonable expectation that leverage will drop to around 3.0x within the 18-month window following closing, the credit profile would be consistent with a 'BBB' rating. Sound Strategic Rationale for Transaction: Thermo Fisher plans to acquire Life Tech for a total cost of about $15.8 billion. This includes a cash consideration of $76 per share ($13.6 billion, a 41% premium to Life Tech's Jan. 15 share price) and the assumption of Life Tech's net debt at closing. Life Tech has LTM revenues and EBITDA of $3.8 billion and $1.2 billion, respectively, implying purchase multiples of 4.2x and 13.2x. If the transaction moves forward on schedule, it will likely close in early 2014 pending regulatory reviews and approval by Life Tech's Board of Directors. Life Tech has been the subject of take-over rumors since January 2013, when the company announced it had hired investment banks to assist in its annual strategic review. The company is a diversified supplier of instruments, consumables and services formed from the merger of Applied Biosystems and Invitrogen in November 2008. A combined Life Tech/Thermo Fisher will have in excess of $16 billion of annual revenue, with exceptional scale and a diverse portfolio of products across research and applied end-markets in the life sciences industry. Fitch believes that there is a strong strategic rationale for the transaction. Life Tech's primary end-markets do overlap significantly with Thermo Fisher's and include academic, government and biopharmaceutical research settings. Life Tech generates strong and stable cash flow (FCF of $660 million in the LTM period ended Dec. 31, 2012) from its portfolio of mostly consumable products, which comprise 85% of sales. Helping to offset somewhat weak organic growth prospects in the research end-markets, Life Tech has recently made progress in diversifying its product portfolio to expand in the hospital/clinical and commercial end-markets. The company has also been investing in the expansion of distribution and manufacturing capabilities in faster-growing emerging markets. Fitch believes the company has decent growth potential in the clinical end-market, based on its portfolio of next-generation DNA sequencing assets. In late 2010, Life Tech's acquisition of Ion Torrent provided a base of assets that it has subsequently developed. The uptake of sequencing technology in clinical markets is, however, in its nascent stages. There remains risk related to obtaining the regulatory and government approvals necessary to support wider application of the technology in clinical settings. Thermo Fisher does not currently own sequencing assets and so the acquisition will provide the company entry into this market, which is complementary with the company's portfolio of diagnostics products. FCF Could Support Debt Reduction: An expectation that Thermo Fisher will curtail share repurchases in order to apply cash to debt reduction following the acquisition of Life Tech would provide support for the ratings. Both Thermo Fisher and Life Tech generate ample and consistent FCF. The level of FCF produced by the combined entity will depend upon the synergies Thermo Fisher is able to realize, as well as interest expense associated with debt issued to fund the acquisition. Without having detail on these variables, Fitch believes the combined entity's FCF will be in excess of $2 billion; this could facilitate rapid debt reduction post the acquisition. Fitch has placed the following ratings of Life Tech on Rating Watch Negative (they were previously on an Evolving Watch): --IDR 'BBB'; --senior unsecured credit facility 'BBB'; --senior unsecured notes 'BBB'. Contact: Primary Analyst Megan Neuburger Senior Director +1-212-908-0501 Fitch Ratings, Inc. 1 State Street Plaza New York, NY 10004 Secondary Analyst Michael Zbinovec Senior Director +1-312-368-3164 Committee Chairperson John Culver, CFA Senior Director +1-312-368-3216 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 16, 2012). Applicable Criteria and Related Research Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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