Fitch Places Life Technologies' Ratings on Evolving Watch
NEW YORK -- January 29, 2013
Fitch Ratings has placed Life Technologies Corp's (Life Tech) ratings,
including the company's 'BBB' Issuer Default Rating, on Rating Watch Evolving.
The ratings apply to approximately $2.4 billion of debt outstanding at Sept.
The ratings reflect the following key credit considerations:
RISK OF A TRANSFORMATIONAL CREDIT EVENT
There is an overhang on the credit profile related to the heightened potential
of a transformational credit event, which Fitch thinks could include a
going-private transaction, an acquisition of the company by a strategic
interest, or restructuring of the business. Earlier this month, a media outlet
reported that Life Tech had approached private equity firms to discuss an
acquisition of the company. The Board of Directors subsequently issued a
statement that it has hired Moelis & Co. and Deutsche Bank to assist in its
annual strategic review. The statement indicated that no particular course of
action has been determined at this time.
Life Tech generates strong and stable cash flow from its portfolio of mostly
consumable products, which could make it an attractive acquisition target for
private equity. That said, Fitch thinks that there is a lack of an obvious
business strategy behind a LBO transaction, such as cost cutting
opportunities. Furthermore, resultant high leverage could limit the company's
financial flexibility to invest in growth opportunities in the evolving life
An acquisition by a strategic interest could be more likely given
opportunities for cost synergies, coupled with the attractive growth potential
of the company's next-generation DNA sequencing assets. The company has
recently been investing in building its portfolio of next-gen assets, but it
remains a small part of the overall business. The realization of strong uptake
of the next-generation assets in clinical end markets will require financial
flexibility to make incremental investments.
The effect of any transaction on the ratings is highly situational and would
depend upon the manner in which it is financed and the effect on the company's
credit metrics. Fitch believes that the debt financing necessary to execute a
LBO would result in debt well in excess of 3.5x EBITDA, which is the level
Fitch views as consistent with maintenance of investment grade ratings for
SENIOR NOTES BENEFIT FROM COC PROVISION
All series of Life Tech's senior unsecured notes include an offer to purchase
at 101% upon a change of control event and a subsequent downgrade to
non-investment grade, providing some protection for bondholders. The note
indentures do not have restrictions on additional debt or subsidiary
guarantees. As a result, Fitch thinks its likely holders would put the notes
for repurchase in the event of an LBO.
If the notes are not put for repurchase, the indentures limit liens with a
permitted carve out of up to $350 million or 15% of CNTA. Fitch estimates the
size of this carve out at $350 million as of Sept. 30, 2012. Fitch expects the
notes would likely become subordinate to any potential debt issued to fund an
LBO to the extent of the permitted liens basket.
More Aggressive Capital Deployment Post Decline in Leverage
Life Tech's debt leverage has consistently declined over the past two years,
mostly due to the application of nearly $650 million of cash to debt
reduction, although EBITDA expansion of 3.7% also contributed to the decline.
At 2.0x at Sept. 30, 2012, debt leverage is now at the low end of the company
stated target leverage range of 2.0x-2.5x.
Fitch does not believe the company has financial incentive to manage its
balance sheet with debt below 2.0x, and so expects the company could increase
debt in the near term to fund acquisitions and share repurchases. The company
has stated that it intends to return about 50% of FCF to shareholders through
share repurchases over a multi-year period, and to invest the remaining 50% in
the future growth of the business. Life Tech does not currently fund a
Fitch forecasts sustained annual FCF generation of about $700 million for Life
Tech, implying that the company could fund $350 million of acquisitions from
cash on hand annually while meeting its 50% return to shareholders' target. In
2011 and 2012, Life Tech spent significantly less than this amount on
acquisitions, making a series of small tuck-ins focused on acquiring
distribution capabilities in emerging markets and adding to its product
portfolio in its faster-growth end markets.
IMPROVING GEOGRAPHIC AND END-MARKET DIVERSIFICATION
The biggest risk to Life Tech's operating outlook is ongoing pressure on
government and academic research funding. Sales to research end markets
comprised about 35% of the company's revenue in the LTM period ended Sept. 30,
2012. Favorably, 85% of sales in the period were of consumable products, which
are somewhat less susceptible to volume and price headwinds than sales of
larger capital equipment. However, consumable sales are not immune to these
pressures, as reflected in tepid organic topline growth for Life Tech of 1-2%
in each of the last three quarters.
Fitch thinks that demand for life science tools and products in the developed
markets of the U.S. and Eurozone will rebound slightly in 2013. 2012 was
affected by the roll-off of U.S. government stimulus funding which benefited
life science researchers in 2010-2011. Furthermore, the agreement reached in
U.S. Congress to avoid some elements of the fiscal cliff delayed 8%
sequestration of NIH research funding until at least March 2013.
Helping to offset weak 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 its best growth potential in the clinical
end-market, based on its growing 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 gen-next
sequencing 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.
SOLID LIQUIDITY PROFILE
Life Tech's liquidity profile is solid relative to the 'BBB' IDR and is
highlighted by the company's strong FCF generation. Liquidity is provided by
availability on the company's $750 million credit facility revolver due
February 2017 ($599.6 million available at Sept. 30, 2012) and cash on hand
($274 million at Sept. 30, 2012). FCF for the LTM period ended Sept. 30, 2012
was a solid $764 million, representing a 20.1% FCF margin. The company's FCF
margin has expanded by about 260 bps since 2008, as a result of improved
profitability, better management of working capital and lower capital
expenditures. Fitch expects Life Tech to generate FCF of about $700 million in
The company's debt maturity schedule is not currently a credit concern. Debt
--$250 million senior notes due 2013;
--$500 million senior notes due 2015;
--$400 million senior notes due 2016;
--$750 million senior notes due 2020;
--$400 million senior notes due 2021.
Fitch thinks Life Tech will refinance the 2013 notes maturity; the company
does have capacity on its credit revolver to address the maturity. The credit
facility terms include a financial maintenance covenant requiring total
debt-to-EBITDA of below 3.25x. The company had ample operating cushion under
the bank facility leverage covenant at Sept. 30, 2012.
In the event of an equity-friendly transaction, such as an LBO, the IDR will
be based on the post transaction capital structure. A downgrade of the ratings
out of investment grade would be caused by total-debt-to EBITDA above 3.5x.
There has and continues to be a good deal of consolidation activity in the
segments in which Life Tech operates. After completing a series of small
tuck-ins in 2011-2012, Fitch believes the company could ramp up its
acquisition activity in 2013. Maintenance of the 'BBB' IDR for Life Tech will
require debt-to-EBITDA maintained between 2.0x and 2.5x in the near to medium
term, although periodic increases to fund acquisitions could be tolerated
within the current rating category.
DEBT ISSUE RATINGS
Fitch has placed the following ratings for Life Tech on Rating Watch Evolving:
--senior unsecured credit facility 'BBB';
--senior unsecured notes 'BBB'.
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. 16, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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