Fitch Revises Abbott Laboratories' Rating Outlook to Negative from Stable

Tue May 20, 2014 10:56am EDT

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(The following statement was released by the rating agency) CHICAGO, May 20 (Fitch) Fitch Ratings has affirmed the ratings and revised Abbott Laboratories' (ABT/Abbott) Rating Outlook to Negative from Stable. The rating action follows ABT's announced agreement to acquire CFR Pharmaceuticals (CFRP) for approximately $2.9 billion in cash and the assumption of roughly $500 million of CFRP gross debt. Fitch has affirmed the company's ratings, including the long-term Issuer Default Rating (IDR), at 'A+'. A full list of ABT's ratings follows at the end of this release, and the ratings apply to approximately $7.8 billion of debt outstanding as of March 31, 2014. KEY RATING DRIVERS While Fitch believes the acquisition of CFRP makes strategic sense, it limits the company's willingness and ability to reduce leverage (total debt/EBITDA) to below 1.5x. The rating action also incorporates the following: --That ABT will, in part, focus on shareholders when deploying cash, balancing the return opportunities of share repurchases, acquisitions and dividends (regular dividend recently increased by 57%); --That Abbott generates strong free cash flow (FCF) of $1.3 billion-$1.4 billion, which incorporates the recent dividend increase; --That ABT's diversified product portfolio continues to produce mid-single-digit organic growth with incrementally improving margins in the intermediate term; --That sales of Nutritionals, Diagnostics, and Established Pharmaceuticals, in particular, should benefit from the rapidly growing middle class in emerging markets; and --Fitch expects a continued weak employment environment in the U.S. and government austerity measures in Europe to weigh on Abbott's growth and margins in the developed markets; --Fitch anticipates that ABT's efforts to improve gross and operating margins will continue to yield results, more than offsetting the aforementioned headwinds . Acquisition May Limit Deleveraging Fitch believes that the CFRP acquisition may limit ABT's ability and willingness to reduce total debt leverage to below 1.5x. While Fitch forecasts the acquisition to increase Abbott's pro forma total debt leverage only modestly, the company is currently operating with leverage of 1.76x, higher than the 1.3x-1.5x range expected for this issuer's 'A+' credit rating. With available cash and short-term investments of approximately $7 billion at March 31, 2014 and forecasted 2014 FCF of $1.3 billion-$1.4 billion, the company may choose to build cash balances rather than pay down short-term debt. In Fitch's view, the acquisition of CFR Pharmaceuticals makes strategic sense, as it would increase Abbott's already strong position in the fast-growing Latin American branded-generic pharmaceutical market. ABT expects CFRP will contribute $900 million to annual sales in 2015. Developing markets such as Latin America are expected to provide the bulk for growth of this product segment. The acquisition does pose some integration risk, but Abbott has stated that the financial success of this acquisition does not rely on anticipated significant cost synergies. In addition, the company has successfully integrated significantly larger acquisitions in the past. The transaction is expected to close by the end of the third quarter of 2014. Shareholder-Focused Cash Deployment Fitch believes ABT will be opportunistic with cash deployment as it weighs potential returns for shareholders. As such, the company will likely remain acquisitive, focusing on companies or device platforms that offer innovation and growth, as technological advancement in the device sector remains relatively fragmented. ABT may also consider targets that offer further expansion opportunities into favorable geographies, as evidenced by the announced CFRP acquisition. Fitch expects share repurchases will likely continue, especially in the absence of viable acquisition targets. The company has demonstrated commitment to its dividend, as evidenced by the recently announced 57% dividend increase beginning February 2014. Solid FCF Fitch estimates that ABT will generate solid FCF of $1.3 billion-$1.4 billion in 2014, below the 2013 level due to the $500 million increase in the company's dividend. Nevertheless, positive FCF is expected to be supported by dependable revenue growth and incrementally improving margins. FCF should be sufficient to fund moderate share repurchases and targeted acquisitions. Stable Operations Expected Fitch forecasts that ABT's diversified product portfolio will continue to produce mid-single-digit organic growth in the intermediate term, given the strength of its product offerings and its geographic mix. Emerging markets will represent a larger portion of ABT's revenue. Increasing revenues and margin support should provide for solid FCF generation. Emerging Markets Support Growth Fitch expects the majority of ABT's growth will come from emerging markets during the next two years. Abbott expects that in the coming years, a greater portion of its revenues will be generated in faster growing geographic markets, including the developing markets versus the developed markets of the U.S., Western Europe and Japan. Nutrition and Established Pharmaceuticals should benefit from the rapidly growing middle class in these markets. The vast majority of purchases in these markets are paid for by consumers. The Diagnostics and Medical Devices business should benefit from the growing importance of accessible healthcare as healthcare expenditures become a greater part of these countries' economies. This is in contrast to the developed markets, where the vast majority of purchases involve third-party payers. As such, rising disposable income is an important driver of demand in these markets. Developed Markets to Remain Soft Fitch expects demand trends in developed markets (U.S., Europe and Japan) to remain relatively soft during the next 12 months. A weak employment environment in the U.S. and government austerity measures in Europe will likely persist in the near term. These trends will affect ABT's Established Pharmaceuticals and Medical Devices segments the most. Efforts to Support Margins Fitch anticipates that ABT will continue efforts to drive efficiencies across business segments, resulting in improving margins. Most recently, the company is focused on improving the cost structure in its Nutrition, Established Pharmaceutical and Diagnostic segments. In addition, it has taken out some general and administrative corporate costs. Adequate Liquidity Fitch expects ABT to maintain adequate liquidity, as the company had approximately $7 billion in cash and short-term investments at March 31, 2014 and its unused $5 billion revolving credit facility that expires in July 18, 2017. However, the company had roughly $4.4 billion in short-term debt. In addition, the company will likely continue to have ample access to public debt markets. Manageable Debt Maturities At March 31, 2014, ABT had approximately $7.8 billion in debt outstanding, including $4.4 billion in short-term debt. Fitch believes the company's debt maturities are manageable with roughly $947 million maturing in 2019 and $597 million in 2020. Fitch's forecasts assume that ABT will refinance most of these maturities with the proceeds from new debt issuances. RATING SENSITIVITIES Positive While Fitch does not anticipate a positive rating action in the near- to intermediate-term, revision of the Outlook to Stable could result from ABT committing to and operating with leverage stronger than 1.5x, which would likely require some paydown of short-term debt in the next 12-18 months. In addition, Fitch would expect the company to achieve and maintain relatively stable operations and solid FCF. Negative Future developments that may, individually or collectively, lead to a one-notch downgrade to 'A/F1' include debt remaining above 1.5x EBITDA without the prospect for timely deleveraging (i.e. within the next 12-18 months), which could be the result of operational stress and weakening FCF and capital deployment that does not consider possible debt reduction, if needed. Fitch has revised ABT's Rating Outlook to Negative and affirmed its ratings as follows: --Issuer Default Rating (IDR) at 'A+'; --Senior unsecured bank loan at 'A+'; --Senior unsecured debt at 'A+'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'. Contact: Primary Analyst Bob Kirby Director +1-312-368-3147 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Michael Zbinovec Senior Director +1-312-368-3164 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 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. 15, 2013). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage 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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