CHICAGO--(BUSINESS WIRE)--Fitch Ratings has placed Baxter International Inc.'s (Baxter; NYSE: BAX) long- and short-term ratings on Rating Watch Negative. The action follows the company's announcement that it plans to spin off its BioScience business. A full list of the company's ratings follows at the end of this press release.
The ratings apply to approximately $9.11 billion of debt outstanding at Dec. 31, 2013.
KEY RATING DRIVERS
--Baxter announced today that it intends to spin off its BioScience business to existing shareholders in a tax-free distribution. The company estimates that it will complete the BioScience separation in mid-2015. The proposed spinoff appears fairly straightforward in terms of the company's franchises, with the exception of the BioSurgery, which will be moved to the Medical Products business from the BioScience business.
--Fitch believes the split makes strategic sense as the two business segments generally service different end markets. The Medical Products business primarily serves acute and non-acute care provider settings, while the BioScience business mostly works with individual physicians or physician practices, with a particular focus on hematologists.
--The Bioscience spin will clearly result in a post-spin, legacy Baxter that is smaller in both scale and product breadth. In addition, the Medical Products business operates with lower margins than the BioScience business, although it also has lower capital expenditure requirements. Fitch believes the more narrow focus of legacy Baxter will drive a degree of improved operational efficiency and optimal capital allocation.
--Baxter's post-spin capital structure relative to its operating profile will be the major determinant of the company's ultimate credit rating. Fitch also recognizes the somewhat offsetting effects of a less diversified product portfolio and a more efficient, end-user-focused business model.
--Fitch will resolve the Rating Watch near, or at the time of the spin when it has greater certainty relating to the profitability, cash generation potential and capital structure of post-spin legacy Baxter. In addition, Fitch does not expect Baxter to engage in any major transactions as it prepares for the separation of the two businesses.
GAMBRO ACQUISITION STRATEGICALLY SOUND
Baxter acquired Gambro AB on Sept. 6, 2013 for approximately $3.9 billion from private owners. Fitch believes the transaction is strategically sound, given Baxter's operating focus on the hemodialysis and peritoneal dialysis segments. The Gambro acquisition will enable Baxter to expand both its renal portfolio (particularly in hemodialysis) offering and its geographic reach. While Baxter's $300 million synergies target appears reasonable, in Fitch's view there is integration risk with a transaction of this size.
INTERMEDIATE-TERM LEVERAGE TO REMAIN HIGH
Baxter funded the acquisition with approximately $1 billion of international cash balances and $3.5 billion of new debt issuance. Fitch expects pro forma post-acquisition leverage will remain between 1.8x-2.1x for at least 24 months, leaving the company very little financial flexibility at its current 'A' credit rating. However, Fitch believes Baxter will reduce leverage to 1.5x-1.6x by year-end 2015 through increased profitability and debt reduction of roughly $1 billion.
CONTINUED OPERATIONAL STABILITY
Fitch expects BAX to generate 3%-5% organic growth in nearly all of its business segments through 2015, despite a challenging economic environment. While demand for the company's products is relatively reliable, revenues are modestly sensitive to the macroeconomic environment through reimbursement rates (pricing) and, to a lesser extent, utilization. Fitch expects that the commercializing of pipeline products will also provide support for longer-term growth and margin stability.
POSITIVE BUT LOWER FREE CASH FLOW IN INTERMEDIATE TERM
Fitch expects that BAX will generate more than $3.2 billion in cash flow from operations during 2014, with continued increases in the longer term. Operational cash flow in 2014 should be sufficient to fund approximately $1.4 billion-$1.5 billion of capital expenditures and roughly $1 billion of dividends. Fitch expects capital expenditures will decline to a more normalized $1.2 billion-$1.3 billion by 2015, once the building of the Georgia plasma facility is largely completed.
ACQUISITIVE POSTURE TO PERSIST OVER LONG TERM
Fitch expects targeted acquisitions will remain a core element of Baxter's long-term growth strategy, using cash balances and incremental debt to fund future transactions. Fitch believes the company will focus on platforms that provide enhancements or adjacencies to its existing portfolio. However, Fitch does not expect Baxter to pursue any major transactions prior to the mid-2015 spinoff of the BioScience business. In addition, Baxter's flexibility within the 'A' rating category to pursue leveraging acquisitions will be constrained during the next two to three years owing to its currently stressed leverage.
ADEQUATE LIQUIDITY AND MANAGEABLE LEVERAGE/DEBT MATURITIES
Free cash flow (FCF) for the latest 12 months (LTM) ended Dec. 31, 2013 was approximately $650 million. Cash on hand was roughly $2.7 billion, and BAX had no borrowings on its $1.5 billion credit facility maturing in June 2015 and $289 million available on its $413 million credit facility maturing in December 2014. Total debt was roughly $9.2 billion, and resulting leverage was 3.01x. The company has approximately $1 billion of long-term debt maturing in 2014, $810 million in 2015, $1.10 billion in 2016 and $639 million in 2017.
Fitch will resolve the Negative Watch near, or at the time of the spinoff when it has greater clarity as to the profitability, cash generation potential and capital structure of post-spin legacy Baxter. In addition, Fitch expects that reported leverage for Baxter near the time of the spin will be significantly lower than the 3.01x it was at Dec. 31, 2013.
Fitch placed the following ratings for Baxter on Negative Watch:
--Long-term IDR 'A';
--Short-term IDR 'F1';
--Senior unsecured notes 'A';
--Bank credit facility 'A';
--Commercial paper 'F1'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 15, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage