Nov 30 - Fitch Ratings says that there is no immediate impact on Siemens AG's
('A+'/Stable/'F1') ratings from its GBP 1.7bn acquisition of Invensys Rail. However, the deal
will erode Siemens' financial flexibility in its current ratings.
The acquisition will be paid in full from Siemens' existing cash resources and will further
put pressure on FFO adjusted net leverage at the end of the fiscal year to September 2013
(FY13), following a hike to 2.3x expected by Fitch at end-FY12 from 1.5x at end-FY11. Credit
metrics have already been affected by the recent sizeable EUR2.9bn equity-to-debt swap, the
slow-down in Siemens' end-markets and continued margin pressures, particularly in Energy.
Fitch consequently considers headroom in the current ratings to be limited for further
acquisitions or investments. Nonetheless, Siemens' expected disposal of the baggage handling and
mail sorting business should mitigate the negative financial impact of the acquisition.
Invensys Rail will be merged with Siemens' existing Transportation and Logistics segment in
Infrastructure & Cities. Fitch believes there is a compelling strategic rationale for the
acquisition in view of Invensys Rail's strength in the UK, Spain, US and Australia which
complements Siemens' existing rail automation presence in Europe, China and India. The target's
good earnings generation (EBIT margin of 15% in 2011) and cost synergies of EUR100m per annum
(two-thirds of which are to be realised by 2016) should help Siemens achieve its target of
8%-12% profit margins in the Infrastructure & Cities division. The transaction is expected to
close in Q213, subject to regulatory approvals.
Fitch expects a slow-down in Siemens' end-markets for FY13 and moderate margin improvements,
given the group's focus on profitability. However, the agency expects continued competitive
pressure and weak energy markets to continue to weigh on earnings generation. The group
experienced order intake declines of 10% in FY12, driven by a 14% drop in Energy. The segment's
weak operating profit, which halved to 8% in FY2 from 17% a year earlier, was only partially
offset by earnings strength in Healthcare, which benefited from good growth in China and
Diagnostics and earnings improvement in Imaging and Therapy.
Siemens' ratings continue to be supported by a high degree of product and geographical
diversification as the world's second-largest capital goods producer. It has been relatively
resilient during the recession when revenue remained flat on a like-for-like basis. The group
was one of the few Fitch-rated capital goods companies which increased its margins in FY2009 and
FY2010 and, as a result, remained free cash flow (FCF) positive throughout the downturn. In
addition, the group holds dominant market positions in many sectors, serves a global customer
base and has significant emerging markets presence, where it generates about one-third of its
An upgrade has become more remote in the short term, but could occur if the group's FCF
margin materially improved or debt substantially reduced. Conversely, a negative rating action
could be driven by a change in growth strategy towards more debt-financed acquisitions, leading
to group FFO adjusted net leverage of above 2.5x through the cycle or weaker operating metrics,
such as FCF below EUR1.5bn for more than two years or operating EBITDAR margin below 12% through