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Fitch Rates Becton, Dickinson and Company's Senior Euro Notes 'BBB-'; Outlook Stable
May 23, 2017 / 10:32 AM / 7 months ago

Fitch Rates Becton, Dickinson and Company's Senior Euro Notes 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, May 23 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Becton, Dickinson and Company's (BDX) senior unsecured Euro notes offering. The company intends to use the net proceeds from the offering to fund the purchase of existing notes pursuant to the tender, to fund the purchase and retirement of debt in open market transactions, or otherwise, for general corporate purposes. A full list of ratings appears at the end of the release. The ratings apply to approximately $10.3 billion of debt outstanding at March 31, 2017. The Rating Outlook is Stable. KEY RATING DRIVERS Bard Acquisition Strategically Sound: BDX recently announced plans to acquire Bard for total consideration of about $26 billion including assumption of Bard's debt. Fitch believes the acquisition makes strategic sense, and that the combination will expand BDX's product offerings in infection prevention and medication management. While BDX already has leading positions in these two areas, the addition of Bard's portfolio will enable BDX to supply healthcare providers with a more complete set of therapeutic tools. The acquisition will also give BDX opportunities to drive high-growth platforms in vascular access and biosurgery, as well as a platform on which to build Bard's relatively early-phase expansion into international markets. Extended High Leverage: The Bard acquisition will occur fairly quickly on the heels of the $12 billion acquisition of CareFusion in 2015, extending a period of elevated leverage. The 'BBB-' rating reflects Fitch's expectation that BDX will follow a similar deleveraging path as it did after the purchase of CareFusion; as of its earnings call on May 2, 2017, BDX's debt leverage (Total Debt/EBITDA) declined to below 3x, which was within two years of the CareFusion acquisition. Fitch expects pro forma leverage at the Bard acquisition closing of roughly 4.7x, and assuming a relatively smooth integration, the company should easily generate enough cash flow to reduce debt to below the 3.5x level that Fitch views as consistent with the 'BBB-' rating within two years. Based on Fitch's EBITDA forecast for the combined company, BDX will need to pay down slightly more than $2 billion of debt within the two years following the transaction to reduce leverage to 3.5x. Assuming a slightly increasing dividend, Fitch forecasts annual FCF generation post-acquisition of greater than $2 billion. This deleveraging trajectory is also consistent with the plan the company has articulated to reduce debt to below 3x EBITDA over a three-year period. Recent Acquisitive Posture: BDX has recently increased its acquisitive posture with its bid for Bard and the acquisition of CareFusion in 2015, and Fitch believes this shift makes strategic sense. The evolving dynamics of healthcare reimbursement, including the increasing need for manufacturers and innovators to demonstrate the value of their products to command market share and pricing growth, has contributed to consolidation in the medical device industry. BDX has historically been only modestly acquisitive, evidenced by the fact that it has cumulatively executed roughly $500 million of net cash acquisitions since fiscal 2000, excluding CareFusion. Solid and Improving Operations: BDX has improved operations during the past four years, as is evidenced by top-line growth, expanding margins and generating increasingly positive FCF. The ongoing successful integration of CareFusion bodes well for the prospects of integrating Bard and realizing the approximately $300 million of cost synergies targeted as part of the return profile of the transaction. Expected Strong FCF: Fitch expects normalized annual FCF of the combined firm to be greater than $2 billion. Fitch's expectation of moderately accelerating organic revenue growth and expanding margins will drive the improved cash generation. The stepped-up FCF generation will be necessary in order for BDX to pay down sufficient debt to reduce leverage to below the 3.5x level consistent with the 'BBB-' rating. Offering Value to Providers: Many of the combined firm's products are on the right side of the value equation in health care. Reducing infection rates, improving medication compliance, and increasing provider efficiency all contribute to improving treatment outcomes for patients. Improved outcomes and reduction in medication loss, theft, and shelf-life expiries also help to reduce costs to providers. The company develops products that offer a strong value proposition, which should support the firm's ability to continue negotiating favorable payment terms with customers. DERIVATION SUMMARY The combined Becton, Dickinson and Company (BDX) and C. R. Bard, Inc. (Bard) would be a broadly diversified company with leading market positions in the majority of product platforms and treatment segments in which it operates. The combination also places the firm in the top-tier of medical device, diagnostics and product firms in terms of size and scale. A large portion of sales will be generated by consumable and disposable products, reducing BDX's exposure to potential pricing headwinds to sale of larger and more expensive capital equipment and implantable medical devices. Improving operations, a stable operating environment and an ability to consistently generate meaningfully positive FCF support the company's credit profile. However, its recently increased acquisitive stance weighs on the rating profile. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Bard acquisition closes early in BDX's fiscal 2018 and is financed substantially as proposed, with $1.7 billion balance sheet cash, $12.85 billion of equity and equity-linked securities that quality for 100% equity treatment under Fitch's criteria, $1.6 billion assumed Bard debt and $10 billion in new debt. --Organic revenue growth in the mid-single digits. --EBITDA margin increases to 32%-33%, with the achievement of cost synergies from the Bard acquisition. --Normalized annual FCF (CFO - CapEx - Dividends) of $2 billion-$2.5 billion post-acquisition. --Leverage to decrease to 3.5x within two years of the Bard acquisition closing due to a combination of EBITDA growth and debt paydown. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --BDX generates continued strong operating performance that produces consistently positive and increasing FCF. --The integration of Bard and the related $300 million of cost synergies are largely achieved by 2020. --The company demonstrates the willingness, a rationale and an ability to maintain leverage durably below 3.0x, with acquisitions driving leverage above that for only relatively short periods of 12-24 months. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --BDX fails to generate stable operating performance, and FCF materially and durably deteriorates. --The integration of Bard and the related $300 million of cost synergies fall substantially short of expectations. --Leverage fails to decline below 3.5x by within two years of the Bard acquisition; --The company pursues a more aggressive capital deployment stance regarding acquisitions and/or share repurchases. LIQUIDITY Sufficient Liquidity: BDX presently has sufficient liquidity, including a $2.25 billion revolving credit facility. Liquidity is bolstered by consistently strong cash generation. Fitch expects liquidity to remain strong throughout the forecast period. FCF to Reduce Debt Post-Acquisition: BDX will finance the Bard acquisition with a combination of term loan debt, unsecured bonds and equity. Pre-payable term loans of $2.25 billion and near-term bond maturities (approximately $4.13 billion) will allow BDX to reduce leverage through debt reduction over the next three years. Fitch expects that BDX will direct most of the cash it generates toward debt repayment until it reaches total debt to EBITDA of 3x, at which point debt will likely be refinanced rather than retired. FULL LIST OF RATING ACTIONS Fitch currently has the following ratings: Becton, Dickinson and Company -- Long-Term Issuer Default Rating (IDR) 'BBB-';Stable Outlook; -- Senior Unsecured Credit Facility 'BBB-'; -- Senior Unsecured Notes 'BBB-'. Contact: Primary Analyst Bob Kirby Director +1-312-368-3147 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Britton Costa Senior Director +1-212-908-0524 Committee Chairperson Megan Neuburger Managing Director +1-212-908-0510 Date of Relevant Committee: May 2, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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