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Fitch Places Thermo Fisher's Ratings on Negative Watch
April 15, 2013 / 6:31 PM / 5 years ago

Fitch Places Thermo Fisher's Ratings on Negative Watch

(The following statement was released by the rating agency) NEW YORK, April 15 (Fitch) Fitch Ratings has placed Thermo Fisher Scientific Inc.'s (Thermo Fisher) ratings, including the 'BBB+' Issuer Default Rating (IDR), on Rating Watch Negative. The action follows the company's announcement that it will acquire Life Technologies Corp. (Life Tech) for a total consideration of about $15.8 billion. The ratings apply to $7.1 billion of debt outstanding at Dec. 31, 2012. A full list of ratings follows at the end of this press release. Key Rating Drivers: The funding of the transaction is expected to pressure Thermo Fisher's credit profile, likely resulting in a downgrade of the ratings. There are several issues about which a limited amount is currently known that will influence the post-acquisition credit profile, including: --The amount of debt used to fund the transaction. Fitch expects Thermo Fisher will use a combination of debt and equity funding. --The pricing of the debt used to fund the acquisition, which will effect interest coverage levels and free cash flow generation of the combined company. --Fitch's view of the operational risk inherent in the integration of a company the size of Life Technologies. --Any potential upside to financial results to be realized through synergies. --Thermo Fisher's plans to apply cash to debt reduction in the 12-18 months post the transaction. Rating Sensitivities: Maintenance of a 'BBB+' IDR for Thermo Fisher requires total debt-to-EBITDA of at or below 2.5x. There is tolerance for increased debt to fund acquisitions, as long as Fitch feels the company is willing and able to reduce debt within the 18 months following the transaction. Based on a preliminary analysis of the transaction and assuming Thermo Fisher funds a portion of the purchase price with equity, Fitch thinks debt will be sustained above 2.5x for an extended period. As a result, a one- or two-notch downgrade of the ratings is the most likely scenario. Even if Thermo Fisher elects to fund a portion of the purchase of Life Tech with proceeds from equity issuance, the sheer size of the transaction means that a considerable amount of debt will be added to the balance sheet. If the transaction results in leverage sustaining around 3.0x, it will cause a one-notch downgrade, to 'BBB'. Fitch does believe that the company is committed to maintaining investment grade ratings and expects the transaction to be funded in a manner to maintain at least a 'BBB-' rating, which would be consistent with debt of around 3.5x EBITDA within 18 months following the transaction. Sound Strategic Rationale for Transaction: Thermo Fisher plans to acquire Life Tech for a total cost of about $15.8 billion. This includes a cash consideration of $76 per share ($13.6 billion, a 41% premium to Life Tech's Jan. 15 share price) and the assumption of Life Tech's $2.2 billion of debt. All series of Life Tech's notes include an offer to purchase at 101% upon a change of control event but only if the event results in a downgrade of the ratings to below investment grade. Life Tech has LTM revenues and EBITDA of $3.8 billion and $1.2 billion, implying purchase multiples of 4.2x and 13.2x, respectively. If the transaction moves forward on schedule, it will likely close in early 2014 pending regulatory reviews and approval by Life Tech's Board of Directors. Life Tech has been the subject of take-over rumors since January 2013, when the company announced it had hired investment banks to assist in its annual strategic review. The company is a diversified supplier of instruments, consumables and services formed from the merger of Applied Biosystems and Invitrogen in November 2008. Fitch believes that there is a strong strategic rationale for the transaction. Life Tech's primary end-markets do overlap significantly with Thermo Fisher's and include academic, government and biopharmaceutical research settings. Life Tech generates strong and stable cash flow (free cash flow of $660 million in the LTM period ended Dec. 31, 2012) from its portfolio of mostly consumable products, which comprise 85% of sales. Helping to offset somewhat weak organic growth prospects in the research end-markets, Life Tech has recently made progress in diversifying its product portfolio to expand in the hospital/clinical and commercial end-markets. The company has also been investing in the expansion of distribution and manufacturing capabilities in faster-growing emerging markets. Fitch thinks that the company has decent growth potential in the clinical end-market, based on its portfolio of next-generation DNA sequencing assets. In late 2010, Life Tech's acquisition of Ion Torrent provided a base of assets that it has subsequently developed. The uptake of sequencing technology in clinical markets is, however, in its nascent stages. There remains risk related to obtaining the regulatory and government approvals necessary to support wider application of the technology in clinical settings. Thermo Fisher does not currently own sequencing assets and so the acquisition will provide the company entry into this market, which is complementary with the company's portfolio of diagnostics products. Aggressive Capital Deployment Leaves Limited Flexibility at 'BBB+' Rating Level: At 2.7x at Dec. 31, 2012, Thermo Fisher's leverage leaves it limited flexibility at the 'BBB+' rating category. The company added $4.8 billion of debt to the capital structure over the past two years to fund three sizeable acquisitions. A downgrade of the ratings to 'BBB+' in July 2012 resulted from the combined pressure of the acquisitions, an expanded share purchase program and a new dividend on the balance sheet. An expectation that Thermo Fisher will curtail share repurchases in order to apply cash to debt reduction following the acquisition of Life Tech would provide support for the ratings. Both Thermo Fisher and Life Tech generate ample and consistent FCF. The level of FCF produced by the combined entity will depend upon the synergies Thermo Fisher is able to realize, as well as interest expense associated with debt issued to fund the acquisition. Without having detail on these variables, Fitch thinks the combined entity's FCF will be in excess of $2 billion. This could facilitate rapid debt reduction post the acquisition. Fitch has placed the following ratings of Thermo Fisher on Rating Watch Negative: --Long-term Issuer Default Rating (IDR) 'BBB+'; --Short-term IDR 'F2'; --Senior notes 'BBB+'; --Commercial paper 'F2'. Contact: Primary Analyst Megan Neuburger Senior Director +1-212-908-0501 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Michael Zbinovec Senior Director +1-312-368-3164 Committee Chairperson John Culver, CFA Senior Director +1-312-368-3216 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research Corporate Rating Methodology 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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