Dec 5 - Fitch Ratings has placed Baxter International Inc.'s
(Baxter; NYSE: BAX) long-term and short-term ratings on Negative Watch,
following its announced agreement to acquire Gambro AB (Gambro). Fitch expects
to resolve the Watch upon completion of the transaction and believes a one-notch
downgrade is likely. A full list of the ratings follows at the end of this press
The rating action reflects the following factors:
--The anticipated acquisition of Gambro AB will significantly increase leverage
in the intermediate term, while enhancing the offering and scale of Baxter's
--Fitch notes that Baxter will have no headroom in the single-A rating category
post acquisition, given that expected leverage (total debt /operating EBITDA)
following the Gambro acquisition will exceed 2.0x.
--Fitch projects that the increased capital expenditure requirements to
construct the Georgia plasma fractionation facility will weigh on free cash flow
(FCF) through 2015.
--Fitch believes BAX will balance the negative effect on cash from the recent
step-up in dividend payments with adjustments to share repurchases in order to
improve its financial profile.
--Fitch expects BAX will continue to generate stable operating performance in
the face of general economic headwinds, owing to its diversity of products, many
of which are life sustaining.
--Fitch forecasts that the company will generate positive FCF (cash from
operations less capital expenditures and dividends) of at least $500 million
annually through 2015, in light of the aforementioned cash deployment plans and
expected stable operating performance.
--Fitch believes that BAX will maintain adequate liquidity and market access to
fund internal investment, dividends and targeted acquisitions.
GAMBRO ACQUISITION STRATEGICALLY SOUND
BAX announced its intention to acquire Gambro AB for approximately $4 billion
from private owners. Fitch believes the proposed acquisition is strategically
sound, given BAX's operating experience in hemodialysis and peritoneal dialysis.
The Gambro acquisition will enable BAX to expand both its renal portfolio
(particularly in hemodialysis) offering and its geographic reach. Baxter will
likely achieve meaningful cost ($300 million) and revenue synergies. The
transaction is expected to close in the first-half of 2013.
INTERMEDIATE-TERM LEVERAGE TO REMAIN HIGH
Baxter intends to fund the acquisition with approximately $1 billion of
international cash balances and $3 billion in new debt issuance. Fitch expects
post-acquisition leverage will remain between 1.5x - 2.1x for at least 24
months, which is inconsistent with an 'A' credit rating for Baxter. However,
Fitch believes Baxter will reduce leverage to roughly 1.5x by year-end 2015 by
increasing profitability and paying down about $1 billion in debt.
CONTINUED OPERATIONAL STABILITY
Fitch expects BAX to generate 3% - 5% organic growth in nearly all of its
business segments through 2013, despite a challenging economic environment.
While demand for the company's products is relatively reliable, revenues are
modestly sensitive to the macroeconomic environment through reimbursement rates
and, to a lesser extent, utilization. Fitch expects that the Baxter's continued
progress in commercializing pipeline products will also provide support for
longer-term growth and margin stability.
POSITIVE BUT LOWER FCF IN INTERMEDIATE TERM
Fitch expects that BAX will generate more than $3.0 billion in cash flow from
operations during 2013, with continued increases in the longer term. Operational
cash flow in 2013 should be sufficient to fund approximately $1.6 billion - $1.7
billion of capital expenditures, roughly $1 billion of dividends, and $300
million of share repurchases.
ACQUISITIVE POSTURE TO PERSIST
Fitch expects targeted acquisitions will remain a core element of Baxter's
long-term growth strategy, using cash balances and incremental debt to fund
future transactions. Fitch believes the company will focus on platforms that
provide enhancements or adjacencies to its existing portfolio. However, Baxter's
flexibility within the single-A rating category to pursue leveraging
acquisitions will be constrained during the next 2 - 3 years.
SIGNIFICANT INTERNATIONAL PRESENCE AND IMPLICATIONS
BAX generates roughly 59% of its business internationally, and its geographic
mix presents certain issues:
--Any adverse changes in tax policy toward international earnings could affect
the company's cash flow.
--Foreign exchange rate fluctuations can benefit or impede revenues, income and
cash flow, despite the company's natural and synthetic hedges.
--BAX's relatively smaller exposure to the U.S. market helps to mitigate some of
the costs associated with the U.S. healthcare reform legislation passed in 2010.
ADEQUATE LIQUIDITY AND MANAGEABLE LEVERAGE/DEBT MATURITIES
FCF for the latest 12 months (LTM) ended Sept. 30, 2012 was approximately $1.24
billion. At Sept. 30, 2012, cash on hand was $3.19 billion, and BAX had no
borrowings on its $1.5 billion credit facility maturing in 2015 and full
availability of its $435 million credit facility maturing in 2013. Total debt
was roughly $5.95 billion, and resulting leverage was 1.61x. The company has
approximately $300 million of long-term debt maturing in 2013, $350 million in
2014, $860 million in 2015, $600 million in 2016 and $500 million in 2017.
WHAT COULD TRIGGER A RATING ACTION
With forecasted near-term debt-to-EBITDA of 2.1x - 2.3x (post Gambro
acquisition), Baxter will have no headroom in the single-A category. Therefore,
Fitch does not anticipate a positive rating action for Baxter in the near term.
A one-notch downgrade is likely upon the completion of the Gambro acquisition,
funded in part with $3 billion of additional debt. Resulting leverage is
expected to persist above 1.6x for more than 18 months.
Further negative rating actions could result from the following:
--Baxter is unable to successfully integrate Gambro and does not realize the
forecasted $300 million in cost synergies by 2016;
--Baxter does not reduce leverage below 2.0x within 18-24 months of the Gambro
--Material and lasting deterioration in operations and operational and FCF
relative to Fitch's forecasts.
Fitch has placed Baxter's following ratings on Negative Watch:
--Long-term IDR 'A';
--Short-term IDR 'F1';
--Senior unsecured notes 'A';
--Bank credit facility 'A';
--Commercial paper 'F1'.
Fitch has placed Baxter Holding B.V.'s following ratings on Negative Watch:
--Long-term IDR 'A';
--Short-term IDR 'F1'.
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.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology