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Fitch Affirms Intel at 'A-/F1' on Mobileye Acquisition; Outlook Stable
March 15, 2017 / 2:28 PM / 9 months ago

Fitch Affirms Intel at 'A-/F1' on Mobileye Acquisition; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, March 15 (Fitch) Fitch Ratings has affirmed the ratings for Intel Corporation (Intel), including the Long- and Short-Term Issuer Default Ratings (IDR) at 'A+/F1', on news that the company will acquire computer vision for advanced driver-assistance systems (ADAS) provider, Mobileye NV (Mobileye), for $14.7 billion in cash. The Rating Outlook is Stable. Fitch's actions affect $25.3 billion of total debt. A full list of rating actions follows at the end of this release. Fitch believes the acquisition combines Mobileye's strong chip-based camera systems with Intel's data center, artificial intelligence (AI) and connectivity capabilities to create end-to-end autonomous driving (AD) system solutions. This should enable Intel to accelerate time to market and customer adoption of vehicle systems and services in a crowded field of competitors aggressively positioning themselves within a nascent ADAS market, which is expected to reach $70 billion by 2030. Fitch views the transaction as Intel's latest step in a move toward markets for the internet of things (IoT) and away from the company's legacy personal computing business, which still represented 55% of consolidated revenue and 58% of allocated operating income in 2016. The deal also hedges against the company's dominant data center share, which Fitch believes will be increasingly difficult to defend over time, given expectations for customer demand for competing suppliers and architectures. The transaction adds approximately $450 million of higher profit margin revenue (Fitch's forecast for 2017) to Intel's IoT segment, which still should represents roughly 5% of consolidated net revenue for the year. Intel's acquisition of Mobileye is expensive - even by recent deal standards - with a more than 70x Fitch estimated forward operating EBITDA. Intel expects $150 million of cost synergies exiting 2019 from the consolidation of administrative functions and consolidation of overlapping development. Despite its strategic rationale, Fitch believes the acquisition is credit-neutral solely because Intel is able to use available offshore cash. Otherwise, Intel would need to fund the transaction almost entirely with increment borrowing, likely resulting in total leverage (total debt to operating EBITDA) at or above Fitch's sensitivity of 1.5x, versus a Fitch estimated 1.1x for 2016. Intel announced it reached a definitive agreement to acquire Mobileye via a tender for $63.54 per ordinary share in cash, representing an equity value of approximately $15.3 billion and enterprise value of $14.7 billion. Intel will use off-shore cash, which was $13.6 billion at Dec. 31, 2016, and free cash flow (FCF) to fund the transaction. Intel expects the deal to close within nine months, subject to certain regulatory approvals and closing conditions, as well as a successful tender. KEY RATING DRIVERS Leading Market Positions: Fitch expects Intel's very strong market positions in the data center and personal computers (PC) to provide significant revenue scale, with data center market growing in the mid-single digits offsetting mid-single-digit unit shipment declines in PCs. Technology Leadership: Intel's technology leadership, driven by significant cumulative investments in research and development (R&D) and capital spending will support growth and strong profitability through at least the intermediate term. Solid FCF & Financial Flexibility: Fitch expects Intel's annual FCF to remain robust, despite significant investment intensity. Fitch estimates more than $3 billion annually through the forecast period, providing adequate capacity for organic investments, although the majority of FCF is outside the U.S. High Investment Intensity: Fitch expects R&D and capital spending to continue to represent 35% - 40% of net revenues, driven by the continuation of Moore's Law and non-volatile memory (3D NAND and X-Point) technologies. Customer Concentration: Fitch expects customer concentration will remain significant, given consolidated PC market. Intel's largest PC customers continued to represent approximately 40% of total sales in aggregate. Nonetheless, fast-growing acquisitions such as Mobileye, declining PC unit shipments and Intel's increasing sale mix of data center and IoT customers should diversify Intel's sales mix over time. KEY ASSUMPTIONS --Client Computing Group (CCG) revenue declines by low-single digits, driven by mid-single-digit unit declines offset by price increases from new product introductions and strengthening PC mix; --Data Center Group (DCG) grows by mid-single digits in 2017 and low single digits thereafter with lift from data center spending offset by customer demand for competing architecture and alternate suppliers; --IoT grows by the mid-teens through 2018 and accelerates thereafter from increased use cases, including ADAS; --Non-volatile memory cycles through the forecast with low-single-digit-growth in 2017, followed by double-digit growth in 2018 and negative high-single-digit growth in 2019 and flat growth in 2020; --Low-single-digit growth for security and programmable through the forecast period; --Step-down in operating EBITDA margins from increased price concession in DCG and higher mix of lower margin non-automotive IoT, offset by growing automotive and pricing discipline and richer mix for CCG; --Capital spending remains volatile but in the mid-teens through the forecast period; --Intel closes Mobileye at the beginning of fiscal 2018 growing 25% per year with modestly accretive operating EBITDA margins; --$500 million of annual tuck-in acquisitions with no meaningful impact on financial results; --Intel refinances debt maturities and uses domestic cash left after dividends and acquisitions for share repurchases. RATING SENSITIVITIES Negative rating actions for Intel could result from: --Fitch's expectation for total leverage sustained above 1.5x from debt-financed shareholder returns amid weak operating performance, given a meaningful portion of pre-dividend FCF is outside the U.S.; --Expectation for negative organic revenue growth from share losses in DCG and slower than anticipated IoT adoption compounding negative growth in PCs; --Fitch's expectation for normalized FCF-to-adjusted debt sustained below 10%, as a result of market pricing pressures from strengthened competitive offerings in DCG. Positive rating action is unlikely in the intermediate term but likely would require Fitch's expectations for: --Management's commitment to moderate shareholder returns to maintain total leverage at or below 1x; --Intel maintains significant share leadership and strong profitability in data center, despite intensifying competition from alternative architectures. --Significant disruption from Intel's X-point technology and steady and solid growth in IoT markets, resulting in further diversification of Intel's sales mix and profit pools. LIQUIDITY Fitch believes Intel's liquidity was solid as of Dec. 31, 2016 and supported by $17.1 billion of cash and cash equivalents, short-term investments and trading assets, $13.6 billion of which was located outside the U.S. Fitch's expectation for more than $3 billion of annual FCF also supports the rating with a meaningful portion of pre-dividend FCF generated outside the U.S. The company does not have a revolving credit facility to support its up to $5 billion CP program but Fitch views Intel's strong liquidity as providing ample support for the program. FULL LIST OF RATING ACTIONS Intel Corporation --Issuer Default Rating (IDR) 'A+'; --Short-Term IDR 'F1'; --$5 billion CP program 'F1'; --Senior unsecured notes 'A+'; --Junior subordinated notes 'A'. Altera Corporation --Long-Term IDR 'A+'; --Senior Unsecured Debt 'A+'. The Rating Outlook is Stable. Contact: Primary Analyst Jason Pompeii Senior Director +1 312-368-3210 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Alen Lin Senior Director +1 312-368-5471 Committee Chairperson Megan Neuburger Managing Director +1 212-908-0501 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Date of Relevant Rating Committee: March 14, 2017 Summary of Financial Statement Adjustments - Fitch made no material financial statement adjustments that depart from those contained in the published financial statements of Intel Corporation. Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020576 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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