Fitch Downgrades Thermo Fisher's IDR to 'BBB'; Affirms Life Tech's IDR at
NEW YORK -- December 4, 2013
Fitch Ratings has downgraded Thermo Fisher Scientific Inc.'s (Thermo Fisher)
ratings, including the long-term Issuer Default Rating (IDR), to 'BBB' from
'BBB+' and has assigned a 'BBB' rating to the proposed senior notes. The
long-term IDR of Life Technologies Corp. (Life Tech) is concurrently affirmed
at 'BBB'. Thermo Fisher plans to acquire Life Tech and will assume $2 billion
of outstanding debt at the close of the transaction. The ratings apply to $9
billion of debt at Sept. 28, 2013. All ratings are removed from Negative Watch
and the Rating Outlook is Negative. A full list of rating actions follows at
the end of the press release.
Key Rating Drivers:
--The downgrade reflects the influence of the funding of the $15.8 billion
acquisition of Life Tech on Thermo Fisher's credit profile.
--Funding the transaction will add approximately $10.8 billion of debt to
Thermo Fisher's balance sheet and drive pro forma leverage (total debt to
EBITDA) to nearly 4.5x at the close of the transaction.
--Maintenance of the 'BBB' IDR will require Thermo Fisher to reduce leverage
to 3.0x or below by the end of 2015.
--Fitch forecasts Thermo Fisher to produce adequate free cash flow (FCF; cash
from operations less capital expenditures and dividends) to accomplish this
level of debt reduction. However, it will require the company to refrain from
other asset purchases and share repurchases in 2014-2015.
--EBITDA growth should also contribute to leverage reduction barring any major
difficulties in integration of the Life Tech business.
Aggressive Capital Deployment Pressures Credit Profile
The ratings are influenced by a pattern of aggressive capital deployment over
the past several years that contributed to higher debt levels and
deterioration of credit metrics. Although funding sources for the Life Tech
acquisition include approximately $3 billion of equity proceeds and $2 billion
of cash on hand, Fitch expects that funding of the transaction will add a
total of $10.8 billion of debt to Thermo Fisher's balance sheet, driving pro
forma leverage absent the consideration of any transaction related financial
synergies to nearly 4.5x versus the Sept. 28, 2013 level of 2.6x.
Prior to the Life Tech acquisition, the company funded three fairly sizeable
acquisitions in 2011-2012, as well as a high level of share repurchases.
Thermo Fisher also instituted a regular dividend in 2012, which consumes about
$220 million of cash from operations (CFO) annually. Thermo Fisher has not
indicated a cash return to shareholder policy in terms of a percent of CFO
applied to share repurchases and dividends, but funded a high level of
shareholder cash payouts in 2011-2012, spending 70% and 50% of CFO on share
repurchases and dividends, respectively, in these years.
Debt Reduction Plan Appears Rationale and Achievable
Despite funding a high level of business development activities and returns to
shareholders, Thermo Fisher has consistently maintained leverage within a
publicly stated target range of 2.5x-3.0x. The company suspended the share
repurchase program upon the announcement of the Life Tech acquisition in
second quarter 2013, and management has publicly stated that the priority for
cash deployment will be debt reduction until leverage is reduced to 3.0x or
While growth in EBITDA should contribute to leverage reduction, Fitch expects
that reducing leverage to 3.0x by the end of 2015 will require the company to
apply the majority of FCF to pay down debt in the two years following the
acquisition. Fitch forecasts EBITDA of $4.6 billion for Thermo Fisher in 2015
versus a pro forma level of $4 billion. This forecast implies that the company
will need to use $4.2 billion of cash to pay down debt to meet the leverage
Fitch thinks this amount of debt paydown is achievable, assuming the company
refrains from other acquisitions or share repurchases. On a stand-alone basis,
both Thermo Fisher and Life Tech generate ample and consistent FCF. This
provides excellent financial flexibility and is a key support of the credit
profile of the combined company. Fitch projects annual FCF generation of $2.6
billion for the combined company by 2015.
The expectation for a high level of debt repayment is supported by the terms
of the debt used to fund the acquisition, which include a $5 billion bank term
loan and $3.8 billion to consist of the proposed senior notes and commercial
paper (CP). The bank term loan requires amortization of $500 million in 2014
and $1 billion in 2015. Thermo Fisher's debt agreements also encourage
deleveraging. A financial maintenance covenant in the term loan and bank
revolving credit facility agreements requires Thermo Fisher to maintain a
consolidated leverage ratio of no more than 5.5x in the first six months post
the close of the Life Tech acquisition, decreasing to 4.5x post six months,
4.0x post 12 months and 3.5x post 18 months.
Acquisition Strategically Sound
Fitch believes that there is a strong strategic rationale for the transaction.
Life Tech's primary end-markets overlap significantly with Thermo Fisher's and
include academic, government and biopharmaceutical research applications as
well as clinical healthcare settings. The acquisition will provide Thermo
Fisher with significant scale in the bioscience and consumable diagnostics
space. Life Tech generates strong cash flow (FCF of $706 million in the LTM
period ended Sept. 30, 2013, representing an 18.4% FCF margin) from a
portfolio of mostly consumable products, which comprise 85% of sales.
The addition of the Life Tech portfolio of products will increase the
proportion of Thermo Fisher's sales that can be classified as 'recurring'
consumables or services to 61% from 56%. Sales of consumable products are
highly profitable and fairly predictable, since demand is somewhat less
susceptible to the headwinds that are influencing sales of larger capital
equipment in the life sciences sector, particularly in government and academic
research end-markets in the U.S. and western Europe.
Helping to offset somewhat weak organic growth prospects in the government and
academic end-markets, Life Tech has recently made progress in diversifying its
product portfolio to expand in the hospital/clinical and commercial
end-markets. Similar to Thermo Fisher, Life Tech has also been investing in
the expansion of distribution and manufacturing capabilities in faster-growing
Life Tech Debt Ratings Affirmed at 'BBB'
Life Tech has approximately $2 billion of senior notes due 2015, 2016, 2020
and 2021 that Fitch expects will remain outstanding after the acquisition. To
accommodate this structure, Life Tech will be set up as a wholly-owned
operating subsidiary of the parent company, Thermo Fisher Scientific, Inc. The
parent company is the issuer and obligor of all other debt in the capital
structure. There will not be any upstream or downstream guarantees of the debt
outstanding at either of the parent or Life Tech subsidiary level.
The debt issued by the Life Tech subsidiary will be structurally senior to the
debt outstanding at the parent level to the extent of the assets of the
subsidiary. At Sept. 30, 2013, Fitch calculates debt leverage at the Life Tech
sub of about 1.7x, implying a potentially stronger financial profile at the
subsidiary level. However, the ratings are equalized at the level of parent's
'BBB' rating. Although there are not legal ties in the form of guarantees,
Fitch believes there are strong operational and strategic linkages between the
parent and subsidiary. Furthermore, Thermo Fisher plans to consolidate the
results of the Life Tech subsidiary at the parent company level. Without
stand-alone financials at the subsidiary level Fitch will not be able to
assess its financial status on an on-going basis.
Short-Term Rating Affirmed at 'F2'
Thermo Fisher plans to issue CP to fund a portion of the acquisition. The
company will have 100% external liquidity back-up of the CP through a $1.5
billion revolving credit facility maturing July 2018. As of Sept. 30, 2013,
there were no borrowings under the facility, although capacity was reduced by
$46 million in letters of credit outstanding. If the company borrows under the
facility, it intends to leave an amount undrawn sufficient to cover
outstanding CP. At Sept. 28, 2013, there was $50 million of CP outstanding.
In addition to assessing external liquidity coverage of short-term debt
obligations, Fitch's rating methodology for assigning short-term ratings to
issuers with long-term IDRs of 'BBB' considers the company's sources of
internal liquidity available to meet short-term debt obligations in the event
external sources of liquidity are not available.
Thermo Fisher's internal liquidity ratios are weak relative to the 'F2' rating
because of the influence of the required amortization of the $5 billion term
loan in 2014-2015 on coverage ratios. Fitch is affirming the 'F2' short-term
rating despite the weak internal liquidity ratios. Thermo Fisher's operating
profile is consistent with an 'F2' rating. The company has a well-known brand
and product portfolio, and the cash flows do not exhibit a high degree of
seasonality or working capital related swings.
Maintenance of the 'BBB' IDR will require Thermo Fisher to reduce leverage to
3.0x by the end of 2015. A downgrade could result if it appears likely that
the company will not meet this target because cash deployment for acquisitions
or shareholder payouts delays debt repayment, or growth in EBITDA is hampered
by difficulties in the integration of Life Tech, or operating trends are
weaker than expected.
A positive rating action is not anticipated before the end of 2015, since it
would require the company to commit to maintain leverage below 2.5x. A
revision of the Rating Outlook to Stable could occur near the end of 2014 if
Fitch believes the company has made sufficient progress in debt reduction to
achieve the 3.0x leverage target during 2015.
Fitch has taken the following rating actions:
--Long-term IDR and senior notes downgraded to 'BBB' from 'BBB+';
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2';
--Proposed senior notes and $5 billion term loan rated 'BBB';
--Long-term IDR and senior notes affirmed at 'BBB'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
--'2014 Outlook: U.S. Healthcare - Secular Challenges Require a Compelling
Value Proposition' (Nov. 25, 2013).
Applicable Criteria and Related Research:
2014 Outlook: U.S. Healthcare -- Secular Challenges Require a Compelling Value
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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