(The following statement was released by the rating agency)
CHICAGO, February 28 (Fitch) Fitch Ratings has assigned a 'BBB'
rating to Abbott
Laboratories' senior unsecured notes offering. The notes are
offered to exchange
for the roughly $3.1 billion outstanding senior unsecured notes
of St. Jude
Medical, Inc. (St. Jude), which Abbott acquired in January 2017.
Outlook is Stable.
KEY RATING DRIVERS
--While St. Jude is a good strategic fit, the acquisition will
stress leverage for at least two years, with or without the
--Abbott's diversified product portfolio is positioned to
mid-single-digit organic growth over the forecast period.
--Fitch anticipates Abbott's efforts to improve operating
margins will continue
to yield results through improvements in sales mix and cost
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 Abbott will maintain adequate liquidity through
bank credit and access to the capital markets.
Sound Acquisitions/High Leverage: Abbott's acquisition of St.
Jude and potential
acquisition of Alere are both a good strategic fit. Both expand
presence in current operating segments by providing the company
product offerings. The acquired portfolios, in aggregate, will
organic growth potential. Abbott filed suit to terminate its
Alere for $5.8 billion cash (equity value) and around $2.6
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
leverage forecast to
remain above 3x through 2019. Without the Alere acquisition,
would likely remain near or above 3x through 2018. Fitch expects
reduce leverage to durably below 3x thereafter, through a
combination of debt
reduction and increased EBITDA. Operating margins will likely
improve because of
favorable shifts in sales mix, good cost control and
synergies. FCF should stay significantly positive (excluding
restructuring costs). Fitch's 'BBB'/'F2' ratings assume 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 forecast 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 robust 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
Projected revenue growth and moderately improving margins should
generation. Capital expenditures and dividends increase
incrementally 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
should affect margins
less than reported revenues because the company has significant
costs) in some geographies that are experiencing currency
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 is in contrasts to
where the vast majority of purchases involve third-party payers.
As such, rising
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 the St. Jude and Alere pipelines will
innovative product introductions over the long term.
Fitch's key assumptions within the rating case for Abbott
--Leverage increases significantly in the near- to
--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:
--Abbott's successful integration of the St. Jude acquisition,
realization of the stated synergies of $500 million;
--Continued operational improvements that support long-term
growth and margin improvement;
--Consistently positive adjusted FCF;
--Conservative cash deployment, including debt reduction that
results in a
capital structure that could consistently maintain leverage near
or below 3x in
2019 and thereafter.
Negative: Future developments that may individually or
collectively lead to a
negative rating action include:
--Failure to successfully integrate the St. Jude acquisition and
stated $500 million in synergies;
--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 3x at
year-end 2019 and thereafter.
Adequate Liquidity: Fitch expects Abbott to maintain adequate
full availability on its $5 billion revolving credit facility
that expires in
July 2019 and availability on its commercial papter program.
FULL LIST OF RATINGS
Fitch currently rates the entities as follows:
--Long-Term Issuer Default Rating 'BBB', Outlook Stable;
--Senior unsecured bank credit facility 'BBB';
--Senior unsecured debt 'BBB';
--Short-Term IDR 'F2';
--Commercial paper program F2'.
St. Jude Medical, Inc.
--Long-Term IDR 'BBB', Outlook Stable;
--Senior unsecured debt 'BBB'.
Bob Kirby, CFA
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
Megan Neuburger, CFA
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Date of relevant committee: Jan. 3, 2017.
Summary of Financial Statement Adjustments - Financial statement
that depart materially from those contained in the published
statements of the relevant rated entity or obligor are disclosed
--Historical and projected EBITDA is adjusted to add back
Additional information is available on www.fitchratings.com
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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