-- U.S.-based medical products company Baxter International Inc.
announced a definitive agreement to acquire privately-held dialysis product
company Gambro AB for approximately $4 billion.
-- The deal will be financed with roughly $1 billion of overseas cash and
the proceeds from $3 billion of new debt.
-- We believe that the additional debt will push Baxter's credit metrics
outside our guidelines for a "modest" financial risk profile. We now view
Baxter's financial risk profile as "intermediate".
-- We are lowering our corporate credit and unsecured debt ratings on
Baxter to 'A' from 'A+', given the company's weakened financial risk profile.
-- Our short-term rating on Baxter remains 'A-1'.
-- The stable outlook reflects our view that product diversity should
help Baxter absorb setbacks in any one product line, and that its financial
risk profile will improve slowly but remain "intermediate" for the next two
On Dec. 6, 2012, Standard & Poor's Ratings Services lowered its corporate
credit and unsecured debt ratings on Baxter to 'A' from 'A+'. Our short-term
rating on the company remains 'A-1'. The lower ratings reflect our view of the
company's weakened financial risk profile, which we now view as intermediate
and had previously viewed as modest. The proposed acquisition of Gambro will
add roughly $3 billion of new debt, which will push pro forma debt to EBITDA
to around 2.5x from 1.9x as of Sept. 30, 2012. This well exceeds our
previously published downgrade trigger of more than 2x (without expectations
of rapid deleveraging). We believe that deleveraging will be slow given the
company's numerous calls on cash such as dividends, share repurchases, and
capital to build and expand its plasma fractionation capacity.
The ratings on Baxter continue to reflect its "strong" business risk profile
as a leading manufacturer of diversified and relatively noncyclical medical
products. The company has extensive worldwide operations, solid distribution
channels, a very large and entrenched customer base, and low-cost
manufacturing. The acquisition of Gambro does not change our view of the
company's business risk. We have revised our financial risk profile to
"intermediate" reflecting a less conservative balance sheet, stable recurring
revenues from consumables and disposables, and strong liquidity.
We expect that, over the near term, revenues (excluding the impact of Gambro)
will grow in the low- to mid-single digits, in line with overall health care
industry growth. We believe Baxter can sustain an adjusted EBITDA margin (per
our calculation) of around 30%, as manufacturing optimization programs,
operating leverage, and expanded product offerings offset the impact of health
care legislation, global pricing pressures, costs associated with plant
expansions, and the lower-margin Gambro business. Debt (adjusted for factored
receivables of $154 million, operating leases of $679 million, unfunded
pension liabilities of $1.2 billion, and $3 billion of assumed
acquisition-related debt) was $11 billion on a pro forma basis as of Sept. 30,
2012. Debt to EBITDA is about 2.5x at Sept. 30, 2012 on a pro forma basis, and
we expect pro forma funds from operations (FFO) to debt to be at the lower end
of the 30% to 45% range for an intermediate financial risk profile. We expect
very modest deleveraging over the next two years.
Baxter develops, manufacturers, and markets a broad array of products for the
treatment of hemophilia, immune disorders, infectious diseases, kidney
disease, trauma, and other chronic and acute medical conditions. Its diversity
is evidenced by many product categories that operate under its bioScience and
medical products business segments; no product category contributes more than
18% of total sales. We believe some loss in market share of infusion pump
systems, because of the U.S. Food and Drug Administration-mandated COLLEAGUE
infusion pump replacement, will not be material to results. Baxter has a broad
geographic footprint, deriving 59% of 2011 revenues from outside the U.S.,
including a meaningful presence in emerging markets. It is a leading supplier
with strong brand awareness, selling products in more than 100 countries, and
manufacturing products in 27 countries; end users are diverse. However, Baxter
is exposed to competitive pressures, particularly in markets with
commodity-like characteristics, such as plasma, and/or where generic
alternatives are available. Thus, in addition to development of new products
and product indication expansions, it distinguishes itself with optionality in
treatment regiments, innovative packaging, and unique medication delivery
Baxter has a robust product pipeline because of its targeted investment in
research and development (R&D), which we believe will help it remain
competitive in an industry facing relatively fast innovation cycles for
certain products. R&D spending was $946 million (7% of revenues) and
acquisition spending was $590 million in 2011. Pricing remains under pressure
from large purchasing groups in the U.S. and international tenders. Certain of
Baxter's markets (e.g., plasma products) have commodity-like characteristics.
Baxter plans to upgrade its older plasma-fractionation facility in the coming
year to position itself for future growth and is beginning construction of a
new facility in Covington, Georgia. It also entered into a manufacturing
services agreement with Stichting Sanquin Bloedvoorziening that will provide
up to 1.6 million liters of incremental plasma fractionation capacity.
Our short-term credit rating on Baxter is 'A-1'. We continue to believe Baxter
has strong liquidity to meet its needs over the next two to three years,
despite the drop in cash balances to fund the acquisition. The use of cash for
expansion projects and acquisitions has removed much of the cushion for our
assessment of the company's liquidity as strong. Our view of its liquidity
profile incorporates the following expectations:
-- We expect liquidity sources (primarily cash, discretionary cash flow,
and revolving credit facilities) to exceed uses (including dividends and
anticipated share repurchases) by at least 1.5x over the next two to three
-- We expect liquidity sources to continue to exceed uses, even if EBITDA
declines by 30%.
-- We believe Baxter can absorb a high-impact, low-probability event.
-- We believe Baxter has well-established bank relationships.
Baxter's strong liquidity is evidenced by $3.2 billion of cash and equivalents
on Sept. 30, 2012, and cash flow from operations of $3.3 billion for the 12
months ended Sept. 30, 2012, generously covering capital expenditures of $1.2
billion for that period. Baxter will use roughly $2 billion of cash for its
planned acquisition of Gambro and its investments in plasma fractionation
facilities. Baxter's low effective income tax rate of about 21% enhances free
cash flow. The company manages its tax strategy to generate sufficient cash
denominated in U.S. dollars to fund U.S. cash needs. However, cash demands in
the U.S. often outstrip U.S. cash flows, resulting in a mismatch of U.S. cash
that is often made up for through reimported overseas cash or balance sheet
Baxter's commercial paper programs ($1.4 billion), used to support operational
requirements, are backed up by a $1.5 billion revolving credit facility that
matures in June 2015. The company also maintains a $393 million (at Sept. 30,
2012) euro-denominated credit facility, which matures in January 2013. At
Sept. 30, 2012, Baxter had no commercial paper outstanding, and both the
revolvers were undrawn.
Baxter has a capital allocation guideline to return about 35% to 40% of
internally generated cash to shareholders. It recently increased its dividend
by 34%, which will translate into a roughly 40% payout ratio. We expect share
repurchases will be tempered to roughly $300 million in 2013 and 2014
following the Gambro acquisition, and then increase to about $750 million
Our rating outlook on Baxter is stable. Product diversity should help the
company absorb setbacks of any one product line. We could lower our ratings if
we believe Baxter is willing to operate on a long-term basis at the weaker end
on an intermediate financial risk profile (debt to EBITDA of 2x to 3x, and FFO
to debt of 30% to 45%). We currently believe that Baxter is committed to
slowly improving its financial risk profile following the Gambro acquisition.
However, we would likely lower the rating if revenue declines or operating
losses would be material enough to stall or reverse improvement in the
company's financial risk profile.
It is unlikely that we would raise our ratings on the company over the next
two years. However, we could raise our ratings on Baxter over the long term if
the company improves credit metrics to be in line with a modest financial risk
profile, and we believe that the company will operate at the improved level on
an ongoing basis.
Related Criteria And Research
-- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For
Corporate And Sovereign Issuers, May 15, 2012
-- Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade
Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Downgraded; Rating Affirmed
Baxter International Inc.
Corporate Credit Rating A/Stable/A-1 A+/Stable/A-1
Baxter International Inc.
Senior Unsecured A A+
Baxter International Inc.
Baxter Holdings B.V.
Commercial Paper A-1
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left