Fitch Rates Thermo Fisher Scientific's Proposed Notes 'A-'

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to Thermo Fisher Scientific's $2.1 billion proposed senior unsecured notes. Also, Fitch expects to assign an 'F2' rating to Thermo Fisher's $1 billion commercial paper program. A full list of rating actions is below. The ratings apply to about $4 billion of debt outstanding at July 2, 2011. The Rating Outlook is Stable.

Fitch most recently affirmed Thermo Fisher's ratings on May 19, 2011, following the company's announcement that it plans to acquire Phadia AB (Phadia) for about $3.6 billion. Funding sources for the transaction are expected to include the proposed $2.1 billion in five and 10-year senior unsecured notes, $1 billion in commercial paper and $500 million in cash on hand. The acquisition is expected to close in 3Q'11 pending approval by European regulators.

RATING RATIONALE:

--Debt funding for the Phadia and Dionex acquisitions has significantly increased leverage.

--Rapid debt pay-down post the transactions is achievable based on very strong levels of FCF.

--Fitch expects Thermo Fisher to prioritize debt reduction as a use of discretionary FCF in 2012, as opposed to share-holder friendly capital allocation.

--Outside of the temporary impact of debt funding of acquisitions, the 'A-' Issuer Default Rating (IDR) will require debt maintained at or below 2.0x EBITDA.

RECENT ACQUISTIONS STRESS CREDIT PROFILE:

Phadia will be Thermo Fisher's second large acquisition in 2011. In 2Q'11, the company closed on the acquisition of Dionex Corp. (Dionex), for $2.1 billion. Debt funding of these two transactions has resulted in deterioration in credit protection metrics. However, Fitch believes the company's overall credit profile remains consistent with the 'A-' IDR. Debt reduction in the 12-18 months following the Phadia transaction should be achievable on the basis of the company's robust internal liquidity profile and a positive operating outlook for the life science tools and clinical diagnostics sectors.

Funding of the Dionex acquisition added about $2 billion of debt to the capital structure in 1Q'11, and the funding of the proposed Phadia transition is expected to add up to $3.1 billion more. Pro forma for the Phadia transaction, Fitch estimates that debt-to-EBITDA will increase to about 2.8 times (x) from 1.9x at April 2, 2011.

Phadia is a Swedish based manufacturer of clinical diagnostic products and systems with a particular focus on allergy and autoimmune diseases. The company had 2010 revenue and EBITDA of about $525 million and $200 million, implying purchase multiples of 6.8x and 17.3x, respectively. Phadia will become part of Thermo Fisher's specialty diagnostics business within its analytical technologies segment.

The $3.6 billion transaction cost for the proposed acquisition includes $2.1 billion of net debt of Phadia, which Thermo Fisher expects to refinance. Since the amount of acquired revenue and EBITDA is small relative to the size of Thermo Fisher for both Phadia and Dionex, Fitch believes the impact on the company's credit profile related to both financial integration risk as well as the potential upside related to operating synergies is limited in the near term.

EXPECTED COMMITTEMENT TO DEBT REDUCTION SUPPORTS RATINGS:

Fitch expects Thermo Fisher's leverage to periodically trend above the 2.0x level that is consistent with maintenance of the 'A-' IDR due to funding of acquisitions. Given the company's robust FCF generation (in the LTM ended April 2, 2011 the company produced FCF of $1.2 billion, representing a 11.2% FCF margin), Fitch believes the company will have adequate cash on hand to retire a good amount of debt over the next 12-18 months. Fitch anticipates positive EBITDA growth for Thermo Fisher in 2011-2012, both organically and as a result of its recent acquisitions. However, reducing leverage to the 2.0x level would still require the application of about $2 billion of cash to debt reduction over the next 18 months.

In addition to its demonstrated ability to retire debt rapidly, Fitch thinks that Thermo Fisher is committed to use cash for this purpose. If the company elects to prioritize use of cash for other purposes, such as share repurchase or additional acquisitions, to an extent that it that becomes apparent leverage will be sustained at a higher level, it would pressure the ratings. Fitch notes that even under an aggressive debt repayment plan that would result in leverage dropping to around 2.0x by the end of 2012, the company would still have a good amount of discretionary FCF remaining to fund other initiatives.

WELL LADDERED DEBT MATURITY SCHEDULE:

Thermo Fisher's debt maturity schedule is well laddered. The next maturities occur in 2012 when the bank credit facility matures on Aug. 29, 2012 (including only the undrawn $1 billion bank revolver) and $350 million of senior unsecured notes mature in December. Fitch doesn't expect Thermo Fisher to have difficultly extending the term of its bank credit facility based on its strong operational and FCF profile.

Fitch expects Thermo Fisher will have adequate internal cash resources to organically fund its $350 million 2012 notes maturity. At July 2, 2011 the company's cash balance was $1.36 billion.

The company plans to use about $500 million to fund the Phadia transaction. Other debt maturities through 2015 include $700 million of senior unsecured notes in each of 2014 and 2015. Thermo Fisher's bank credit facility includes a financial maintenance covenant requiring leverage to be maintained below 3.5x; Fitch expects debt to remain below that limit pro forma for debt financing for the Phadia acquisition.

DEBT ISSUE RATINGS:

Fitch has affirmed the following ratings on Thermo Fisher:

--IDR at 'A-';

--Short-term IDR at 'F2';

--Senior unsecured notes at 'A-'.

Fitch has assigned the following rating to Thermo Fisher:

--$2.1 billion proposed senior unsecured notes 'A-'.

Fitch also expects to rate Thermo Fisher's $1 billion commercial paper program 'F2'.

The company expects to issue $2.1 billion in five and 10-year notes. Thermo Fisher expects to market the commercial paper program beginning the week of Aug. 15. A $1 billion 364 day unsecured revolving credit facility executed on June 23, 2011 will provide adequate liquidity back up for the commercial paper program. The commercial paper backup revolver includes standard negative covenants, including a financial maintenance covenant requiring debt-to-EBITDA maintained below 3.5x.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Corporate Rating Methodology (Aug. 16, 2010)

Applicable Criteria and Related Research:

Corporate Rating Methodology - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

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Contacts

Fitch Ratings
Primary Analyst
Megan Neuburger, +1-212-908-0501
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Committee Chairperson
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Megan Neuburger, +1-212-908-0501
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Committee Chairperson
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com