NEW YORK--(BUSINESS WIRE)--The acquisition of FEI Company (FEIC; NASDAQ: FEIC) by Thermo Fisher Scientific Inc. (Thermo Fisher; NYSE: TMO) for approximately $4.2 billion (net of cash acquired) is in line with Fitch Ratings' expectations. Fitch has reviewed the transaction but is taking no ratings actions.
The acquisition appears to be strategically sound as FEIC's high-end electron microscopes broaden Thermo Fisher's offerings in its analytical instruments segment and present de minimus overlap with Thermo Fisher's existing products. FEIC's customers are presently somewhat concentrated in the academic end markets. Thermo Fisher's strong presence in the bio-pharmaceutical space, as well as its expansive scale and broad geographic reach, therefore present the opportunity for revenue synergies over time.
The all-cash transaction, which is expected to close in early 2017, is expected to be largely debt-financed, which reduces near term financial flexibility. Fitch calculates pro forma gross leverage between 3.5x-3.6x when the transaction closes, but expects gross leverage to return to around 2.9x within 12 months after the deal is completed, due to a combination of debt repayment and EBITDA growth. Fitch's forecast for EBITDA growth does not rely heavily on realization of synergies from either FEIC or the recently completed Affymetrix acquisition.
Thermo Fisher's ability and demonstrated willingness to de-levering in the aftermath of debt-funded acquisitions is a key consideration in Fitch's decision to take no ratings action following the announced acquisition. Fitch notes that Thermo Fisher's ample free cash flow (FCF), which Fitch forecasts will exceed $3 billion in 2017, should be sufficient to repay roughly half of the debt issued to finance the transaction, as well as to fund modelled share repurchases of $1 billion in 2017. Fitch's projected year-end (YE) 2017 total debt of $14.5 billion and total EBITDA of around $5 billion (including a $250 million contribution from FEIC) implies a YE 2017 gross leverage ratio of roughly 2.9x, which Fitch views as supportive of Thermo Fisher's existing 'BBB' ratings.
In assessing Thermo Fisher's commitment to maintaining a financial profile consistent with solid investment grade ratings, Fitch heavily considers the successful execution of its de-levering plan following its much larger acquisition of Life Technologies Corp. (Life Tech) for $16.8 billion in 2014.
Fitch continues to expect that Thermo Fisher will remain an active acquirer, while maintaining run-rate gross debt/EBITDA of between 2.8x-3.2x, which Fitch views as supportive of Thermo Fisher's 'BBB' ratings. Flexibility at Thermo Fisher's current 'BBB' rating is limited until its de-levering plan is complete. This should be achievable if most targets in 2016-2017 are similar in size or smaller than FEIC - bolt-on acquisitions that augment the company's product portfolio. Larger transactions during this timeframe would require a component of equity financing in order to maintain the company's credit metrics at levels that are commensurate with the current rating category.
Fitch notes that several facets of the firm's credit profile could support higher ratings than the current 'BBB'. These factors include the company's significant scale, good end-market diversification and product mix, as well as its constructive growth outlook, solid margins, and robust cash flow profile. The company's aggressive approach to business development is a primary reason that the ratings are lower than the firm's operating profile suggests.
Fitch currently rates Thermo Fisher and its subsidiaries as follows:
Thermo Fisher Scientific Inc.
--Long-Term Issuer Default Rating (IDR) and senior notes 'BBB';
--Short-Term IDR 'F2';
--Commercial paper 'F2'.
Life Technologies Corp.
--Long-Term IDR and senior notes 'BBB'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
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