July 19 - In response to Ingram Micro Inc.'s (Ingram Micro)
announcement that it will acquire Brightpoint Inc. (Brightpoint), Fitch
has affirmed Ingram Micro's ratings as follows:
--Issuer Default Rating (IDR) at 'BBB-';
--$300 million senior unsecured notes at 'BBB-';
--$750 million senior unsecured credit facility at 'BBB-'.
The Rating Outlook has been revised to Negative from Stable.
Fitch believes Ingram Micro's proposed acquisition of Brightpoint carries
several financial and operational risks which factor in to the Negative Outlook
including the following:
--Significant exposure to troubled handset makers Nokia and RIM (together
representing 47% of all devices distributed in fiscal 2011) in the company's
distribution business. Fitch believes this exposure coupled with a significant
increase in inventory at Brightpoint over the past few quarters could lead to
inventory writedowns and margin compression in the future;
--Fitch views market share consolidation by Apple and Samsung in the handset
market as potentially having a material negative impact on Brightpoint's
distribution business going forward which could lead to additional margin
--Significant customer exposure to Sprint, Metro PCS and T-Mobile in
Brightpoint's logistics business, all three of which have been rumored to be
potential acquisition targets and could cease to be customers if acquired;
--This is Ingram Micro's largest acquisition to date and Fitch believes
management could easily be distracted from its core business if it needs to
address trouble at Brightpoint post-acquisition.
In addition to concerns about Brightpoint's business, Ingram Micro's razor-thin
margins in the face of significant competitive pricing pressure and recent
difficulties in managing the rollout of its global enterprise resources planning
(ERP) system remain concerns for Fitch. In December, Fitch cited concerns for
Ingram Micro around increased operating expenses from running duplicate systems
for the foreseeable future, as well as balancing pricing strategies that
preserve market share and gross margin levels.
Fitch believes that Ingram Micro's ratings could be downgraded if Brightpoint's
logistics business does not demonstrate meaningful EBITDA growth, coupled with a
realization of Fitch's concern for a decline in the company's distribution
business. While Ingram Micro's credit metrics may not be significantly altered
by an erosion in the Brightpoint business post-acquisition close, Fitch believes
that the company's investment-grade credit profile cannot withstand anything
less than a successful acquisition of this size.
Ingram Micro plans to fund the $840 million acquisition with a combination of
cash, long-term debt, and draws on its existing credit facilities. Fitch
believes Ingram Micro will convert its recently announced 364-day $300 million
bridge term loan facility used in the acquisition into long-term debt. The
remaining $540 million acquisition funding will be split among existing cash as
well as utilization of Ingram Micro's revolving credit facilities and A/R
securitization facilities. These facilities had a total of roughly $1.7 billion
in committed capacity as of March 2012. Cash and cash equivalents totaled $991
million as of March 2012.
Pro forma of the acquisition, Fitch estimates total leverage (total debt to
EBITDA) will be roughly 1.5x, and long-term debt leverage (long-term debt to
EBITDA) will be roughly 1.0x. Free cash flow is expected to exceed $300 million
in fiscal 2012. Fitch expects total leverage at Ingram Micro to remain below
2.0x and for long-term debt to EBITDA to remain at or below 1.0x going forward.
Fitch believes that the higher total leverage figure reflects the company's need
to finance working capital with short-term debt, allowing it to reduce leverage
in a business downturn.
Ratings strengths include:
--Ingram Micro's scale of operations including its global footprint, financial
capability and breadth of product offering, which provides a competitive
advantage and a moderate barrier to entry;
--Importance of the wholesale distribution model for original equipment
manufacturers (OEMs), particularly for serving the small-to-medium business
Rating concerns continue to center on:
--Exposure to the cyclicality of IT demand and general global economic
--Potential for the use of free cash flow and/or debt issuance for acquisitions
or for shareholder-friendly actions;
--Low-margin and high working capital nature of the wholesale distribution model
which can lead to volatility in profitability and free cash flow, although
working capital has historically provided a substantial source of liquidity
during cyclical downturns.
Liquidity was solid as of March 31, 2012 and consisted primarily of $991 million
in cash and cash equivalents, an undrawn $750 million senior unsecured revolving
credit facility expiring August 2016 (with $5 million of letters of credit
outstanding), and approximately $1 billion of capacity under various accounts
receivable securitization programs. These receivable facilities include a $500
million U.S. facility that expires in April 2014 as well as several smaller
facilities in Europe and Asia. Available capacity under these agreements can
vary moderately based upon the amount of eligible Trade Accounts Receivable held
by the company at any point in time. Ingram Micro also has several additional
credit facilities it utilizes for liquidity purposes with aggregate capacity of
approximately $736 million, of which $623 million was available to the company
after deducting $25 million of letters of credit outstanding.
Total debt as of March 31, 2012 was approximately $388 million and consisted
principally of $88 million outstanding under various uncommitted revolving
credit facilities, and $300 million senior unsecured notes maturing in 2017. In
addition, Ingram Micro has $140 million outstanding under various uncommitted
off-balance sheet accounts receivable sales agreements which Fitch includes in
its adjusted debt calculations.
WHAT COULD TRIGGER A RATING ACTION
Future developments that may, individually or collectively, lead to negative
rating action include:
--An inability to grow Brightpoint's logistics business to offset expected
weakness in its distribution business;
--Overall operating margin compression at Ingam Micro due to competitive threats
or execution missteps;
Future developments that may, individually or collectively, lead to positive
rating action include::
--The current Rating Outlook is Negative. As a result, Fitch does not currently
anticipate developments with a material likelihood, individually or
collectively, leading to a rating upgrade.
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.