(The following statement was released by the rating agency)
CHICAGO, January 05 (Fitch) Following the acquisition of St.
Jude Medical, Inc.
(St. Jude) by Abbott Laboratories' (ABT, Abbott), Fitch Ratings
both companies' Long-Term Issuer Default Ratings (IDRs) to 'BBB'
with a Stable
Rating Outlook. Fitch has also downgraded Abbott's short-term
IDR to 'F2'.
A full list of rating actions follows at the end of this
KEY RATING DRIVERS
--St. Jude is a good strategic fit, but the acquisition will
stress leverage for at least two years with or without the
acquisition of Alere.
--Abbott's diversified product portfolio is positioned to
mid-single-digit organic growth over the forecast period.
--Fitch anticipates that Abbott's efforts to improve operating
continue to yield results through improvements in sales mix and
plus integration-related cost synergies.
--Fitch forecasts Abbott generating positive free cash flow
(FCF) excluding the
near-term negative effect of one-time acquisition/integration
--The company's Nutrition, Diagnostics and Established
stand to benefit from the growth in emerging markets.
--Abbott's ongoing focus on new product introductions across
virtually all of
its business segments bodes well for growth and margins.
--The company faces challenges regarding reimbursement for some
of its products
and select international economic stress.
--Fitch expects that Abbott will maintain adequate liquidity
generation, bank credit and access to the capital markets.
Sound Acquisitions/High Leverage: Abbott's acquisition of St.
Jude and potential
acquisition of Alere are good strategic fits. Both expand
presence in segments that the company currently operates, by
company with broader product offerings. The acquired portfolios,
will also offer organic growth potential. Abbott filed suit to
acquisition of Alere for $5.8 billion cash (equity value) and
billion of assumed net debt. However, Abbott's 'BBB' rating will
not be affected
if it does not complete the Alere acquisition.
The two acquisitions will significantly increase debt, with
to remain above 3.0x through 2019. Without the Alere
leverage would likely remain near or above 3.0x through 2018.
Abbott will reduce leverage to durably below 3.0x thereafter,
combination of debt reduction and increased EBITDA. Operating
likely improve because of favorable shifts in sales mix, good
cost control and
integration-related synergies. FCF should stay significantly
one-time restructuring costs). The 'BBB'/'F2' ratings assumes
Abbott will pursue
a more conservative approach to capital deployment, with share
dividend increases and acquisitions remaining modest, at least
post-transaction deleveraging period.
The addition of St. Jude's products will significantly expand
device portfolio, particularly in the area of cardiovascular
disease. The deal
will position Abbott as the number-one or number-two player in
many of the
sub-segments of the cardiovascular device market. The
relatively modest overlap in product categories and offers
Abbott a larger
presence in the faster growing device areas of atrial
heart and neuromodulation.
Abbott estimates that it will realize roughly $500 million in
annual cost and
revenue synergies by 2020 from the St. Jude acquisition. Broader
within the sub-segments of cardiovascular should provide Abbott
contracting/shelf space opportunities when contracting with
and purchasing groups. Cost-related synergies in the areas of
sourcing plus some
overlap in sales force and administrative functions should be
addition, Abbott has a demonstrable record of accomplishment
with acquiring and
successfully integrating acquisitions.
Alere Expands Point-of-Care Diagnostics: While recent legal
Abbott and Alere add uncertainty to the completion of the
believes an acquisition of Alere would make strategic sense. The
would increase Abbott's presence in point-of-care diagnostics
and prospects to
expand Alere's products into international markets. Abbott
already has a strong
position in the medical diagnostics market. The point-of-care
segment of the
diagnostics market will likely grow faster than the in vitro
during the intermediate term. The company also expects that it
nearly $300 million in pre-tax synergies by 2019 and more
Durable Margin Improvement: Abbott will presumably focus on
through cost control and generating a favorable shift in sales
mix. In addition
to securing the forecasted acquisition-related synergies, Fitch
looks for Abbott
to continue driving efficiencies across its business segments.
value-added product launches should be able to secure attractive
improvements should be durable during the intermediate term.
Stable Operations Prior/Post Acquisition: Fitch forecasts that
diversified product portfolio will continue to produce
growth in the intermediate term, given the strength of its
product offerings and
its geographic mix. However, adverse foreign exchange movements
hamper reported growth in the near term, although margins should
moderately insulated from the trend. Revenue growth and margin
provide for solid FCF generation.
Positive FCF/Conservative Capital Deployment: Fitch estimates
that Abbott will
generate normalized FCF in 2018 and 2019 of roughly $1.5 billion
billion, with one-time transaction-related costs hampering FCF
Forecasted revenue growth and moderately improving margins will
generation. Capital expenditures and dividends incrementally
increase during the
forecast period, as the company focuses on strengthening its
balance sheet and
credit profile. FCF should be sufficient to fund debt reduction,
repurchases and small acquisitions.
Select Market Headwinds: Abbott faces a few challenges in select
markets, including restrictive reimbursement rates for diabetic
infant nutritionals in the U.S. Unfavorable foreign exchange
rate movements may
hamper reported top-line growth. However, foreign exchange
affects margins less
than reported revenues because the company has significant
operations (costs) in
some geographies that are experiencing currency devaluation.
Emerging Markets Supporting Growth: Fitch expects a significant
Abbott's growth will come from emerging markets, fueled by
demographics and economic growth. Nutrition, Diagnostics and
Pharmaceuticals, in particular, should benefit from the rapidly
class in these markets. Consumer out-of-pocket purchases account
for a large
portion of revenues in these markets. This contrasts to
developed markets, where
the vast majority of purchases involve third-party payers. As
disposable income is an important driver of demand in these
New Product Flow: Abbott continues to refresh its product
portfolio across all
of its business segments, helping to drive growth through market
and/or market penetration. Newer products with improved efficacy
profiles often garner value-added prices, offering support for
margins. Many of
the company's launches are tailored to specific geographies.
Fitch expects the
potential addition of St. Jude's and Alere's pipelines will
innovative product introductions over the long term.
Fitch's key assumptions within the rating case for Abbott
--Leverage to increase significantly in the near to intermediate
--Abbott completes the acquisition of Alere. However, Abbott's
rating will not
be affected if it terminates its merger agreement with Alere.
--Mid-single-digit organic revenue growth with organic growth
modestly offset by
negative foreign exchange rate effects.
--Incrementally improving margins, particularly in Nutritional
Diagnostics, given Abbott's efforts to improve efficiencies in
--Further margin enhancements from St. Jude integration
synergies and Alere.
--Normalized FCF in 2019 of $1.5 billion to $1.6 billion
costs), with one time costs hampering it in the near term.
--Gross debt leverage declining to around 3x in 2019, driven by
and debt reduction.
Future developments that individually or collectively, may
the 'BBB' rating include the following:
--Successful integration of the St. Jude and Alere acquisitions,
realization of the stated synergies of $500 million and $300
--Continued operational improvements that support long-term
growth and margin improvement;
--Consistently positive adjusted FCF;
--Conservative cash deployment, including debt reduction so that
capital structure that would durably maintain leverage near or
below 3.0x in
2019 and thereafter.
Negative: Future developments that may individually or
collectively, lead to a
negative rating action include the following:
--Failure to successfully integrate the St. Jude acquisition and
stated synergries $500 million and $300 million, respectively;
--Material deterioration in operations and FCF for an extended
--Aggressive cash deployment relative to FCF generation that
debt reduction, resulting in gross leverage remaining
meaningfully above 3.0x at
year-end 2019 and thereafter.
Adequate Liquidity: Fitch expects Abbott to maintain adequate
liquidity, as it
will term out all of its and STJ's short-term borrowings ($3.5
billion to $4
billion) and ultimately end up with full availability on its $5
revolving credit facility that expires in July 2019 and
availability on its CP
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
--Long-Term IDR downgraded to 'BBB' from 'A', Outlook Stable;
--Bank credit facility downgraded to 'BBB' from 'A';
--Senior unsecured debt downgraded to 'BBB' from 'A';
--Short-Term IDR downgraded to 'F2' from 'F1';
--Commercial paper program downgraded to 'F2' from 'F1'.
St. Jude Medical, Inc.
--Long-Term IDR downgraded to 'BBB' from 'A-', Outlook Stable;
--Senior unsecured debt downgraded to 'BBB' from 'A-';
--Term loan ratings withdrawn;
--Short-Term IDR withdrawn;
--Commercial paper program rating withdrawn.
Fitch assumes that Abbott will make the outstanding St. Jude
unsecured notes pari passu with that of Abbott Laboratories
Bob Kirby, CFA
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
Megan Neuburger, CFA
Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908
Fitch has made no material financial adjustments that are not
the company's public filings.
Additional information is available on www.fitchratings.com
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