RPT-Fitch Affirms Agilent's IDR at 'BBB+'; Revises Outlook to Stable
Sept 19 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the long-term ratings for Agilent Technologies (Agilent) at 'BBB+' and revised the Rating Outlook to Stable following the announcement that Agilent will separate the Electronics Measurement (EM) and Life Sciences, Diagnostics and Applied Markets (LDA) segments into two stand-alone companies. A full description of Agilent's ratings follows at the end of this release.
Agilent plans to separate EM through a tax-free pro rata spinoff of EM to Agilent shareholders. LDA represents just over 50% of consolidated revenues, and will retain the Agilent name. The separation is expected to close by the end of calendar 2014, subject to customary closing conditions and satisfactory completion of financing.
The 'BBB+' rating is based upon Agilent's stated intent to capitalize LDA with an investment grade profile and target debt-to-EBITDA of below 2x, as well as the expected use cash from EM to retire a portion of existing debt.
KEY RATING DRIVERS
The revision of Agilent's Outlook to Stable from Positive reflects Agilent's reduced revenue and free cash flow (FCF) base and diversification, pro forma for the separation. Fitch also believes achieving leadership positions in targeted molecular diagnostics and clinical markets may require increased flexibility for acquisitions.
Agilent's ratings are supported by: i) leading positions in a number of end markets; ii) strengthening profitability and growing recurring revenue portfolio; and iii) conservative financial policies. Rating concerns include: i) competitors in target markets with greater scale and financial flexibility; ii) potentially sizeable acquisitions, in aggregate, in diagnostics and genomics markets; and iii) de-accelerating revenue growth from impact of U.S. government sequester on academia and government markets.
LDA's leading share has resulted in a significant installed base that supports consistent research and development (R&D) investments, drives recurring revenues growth, and enables penetration in faster growing emerging markets.
Profitability should improve with the full integration of recent acquisitions and realization of cross selling synergies. Aside from gaining core capabilities in diagnostics markets, the acquisition of Dako should drive sales by leveraging LDA's global sales force and indirect channel partners. As a result, operating margin could approach 20% from an estimated 18% currently.
While a leader in certain end markets, LDA competes with Thermo-Fisher Scientific (Thermo-Fisher), which is significantly larger and aggressively expanding its genomics capabilities. The consummation of Thermo-Fisher's pending acquisition of Life Tech will result in an organization four times the size of LDA with a similar profitability profile.
Acquisitions are likely and could be sizeable in aggregate, given significant growth opportunities in diagnostics and genomics markets. Fitch anticipates smaller capabilities-based deals, since few transformative acquisition targets remain, which should reduce integration risk.
The U.S. government sequester's impact on academia and government markets, which represent 12% of LDA revenues, will limit organic growth for life sciences businesses over at least the near-term and may result in structurally lower levels of government grants over the longer-term. This will place greater emphasis on growth in overseas academic research centers.
Fitch believes positive rating actions are unlikely, given the proposed separation.
Negative rating actions could occur if there is:
--Reduced gross profit margin in the company's bio-analytical markets, signaling product commoditization or less robust growth within developing economies;
--Material borrowing to support acquisitions. As of July 31, 2013, Agilent's liquidity was solid and supported by:
--Approximately $2.3 billion of cash and cash equivalents, nearly all of which was located overseas;
--An undrawn $600 million senior unsecured RCF expiring Nov. 1, 2017. Agilent's liquidity is also supported by expectations for more than $500 million of annual FCF.
Total debt was approximately $2.7 billion as of July 31, 2013 and consisted of:
--$500 million of 5.5% senior notes due Sep. 14, 2015;
--$600 million of 6.5% senior notes due Nov. 1, 2017;
--$500 million of 5% senior notes due July 15, 2020;
--$400 million of 3.2% senior notes due Oct. 1, 2022;
--$600 million of 3.875% senior notes due July 15, 2023.
Fitch Ratings has affirmed the following ratings for Agilent:
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured revolving credit facility (RCF) at 'BBB+';
--Senior unsecured notes at 'BBB+'.
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