CHICAGO--(BUSINESS WIRE)--Fitch Ratings view of Honeywell International Inc.'s (HON) credit profile is unchanged by the company's planned $5.1 billion acquisition of the Elster division of Melrose Industries plc. Fitch estimates the transaction will have a limited impact on the company's leverage including debt/EBITDA which could increase to approximately 1.5x on a pro forma basis compared to 1.3x at June 30, 2015.
Fitch's estimate of leverage does not include the impact of expected cost synergies and assumes that 40% of the purchase price is funded with debt. HON expects to use overseas cash to fund 60% - 70% of the transaction cost. Fitch believes HON's solid EBITDA margin (18.7% on an LTM basis at June 30, 2015) and free cash flow (FCF) expected by Fitch to exceed $2 billion in 2015 should enable the company to reduce leverage to previous levels within 12 - 18 months. The acquisition of Elster is expected to close in the first quarter of 2016.
Elster, which will generate an estimated $1.8 billion of revenue in 2015, is one of HON's largest acquisitions. The transaction involves typical integration risk but HON has effectively integrated numerous acquisitions in the past. Other concerns include the high valuation for Elster, the expected increase in HON's debt to help fund the transaction, and additional acquisition activity that could further increase HON's leverage. HON will assume pension liabilities at Elster, primarily in the U.K. and Germany. The amount of net pension liabilities in the U.K. is relatively small, at approximately GBP134 million as of June 30, 2015, but pension plans in Germany are unfunded.
These concerns are offset by Elster's favorable operating margins of 20% and an EBITDA margin estimated by Fitch at 22%. The gas business represents nearly two-thirds of Elster's revenue and has an operating margin of 23%. The electricity and water businesses generate lower margins of 11% and 16%, respectively.
Elster provides industrial equipment and services for gas, electricity and water markets and will augment HON's Environmental Combustion and Controls and Process Solutions businesses. Expected benefits include cost and revenue synergies and expansion into adjacent high-growth markets consistent with HON's focus on high margin, high technology content.
Even after funding the Elster acquisition, HON will have a solid level of liquidity. Liquidity at June 30, 2015 included nearly $6 billion of cash and just under $3.2 billion of short term investments. Most of HON's cash is located outside the U.S. and can be used to fund a large portion of the Elster acquisition, reflecting the location of Elster's revenue. More than two-thirds of Elster's revenue is generated outside North America, including slightly less than one half in Europe.
In addition to cash, HON's liquidity includes a $4 billion credit facility that matures in 2020. Liquidity was offset by $2.8 billion of commercial paper and nearly $1.4 billion of current maturities of long-term debt and short-term borrowings. Long-term debt maturities after 2015 are well distributed and do not exceed $900 million in any single year.
Fitch's existing ratings for HON are as follows:
--IDR 'A';
--Senior unsecured bank credit facilities 'A';
--Senior unsecured debt 'A';
--Short-term IDR 'F1';
--Commercial paper 'F1'.
The Rating Outlook is Stable.
HON's outstanding debt totaled approximately $9.7 billion at June 30, 2015.
Additional information is available on www.fitchratings.com
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