Fitch Affirms Motorola Solutions Ratings at 'BBB' Following Airwave Acquisition; Outlook Negative

CHICAGO--()--Fitch Ratings has affirmed the ratings for Motorola Solutions, Inc. (Motorola Solutions), including the Long-Term Issuer Default Rating (IDR) at 'BBB' following the company's announced acquisition of Airwave Solutions Ltd. (Airwave). The Rating Outlook is Negative. Fitch's actions affect $6.5 billion of debt, including the company's undrawn $2.1 billion revolving credit facility (RCF). A full list of ratings follows at the end of this release.

Airwave is the leading provider of emergency communication networks in Great Britain (GB) and provides Motorola Solutions with a proven service platform to deliver mission critical data and intelligence solutions and expands the company's addressable market. Fitch also believes the deal fits Motorola Solutions focus on growth opportunities in services, as Airwave's network covers the vast majority of GB's land mass based upon technology provided by Motorola Solutions (Terrestrial Trunked Radio).

Motorola Solutions entered into a definitive agreement with Guardian Digital Communication Holdings Limited, a subsidiary of Macquerie Group (Macquerie), to acquire Guardian Digital Communications Limited, the parent company of Airwave, for 817.5 million pounds (approximately $1.2 billion), subject to purchase price adjustments and Airwave's cash at closing. Additionally, a deferred payment of 64 million pounds will be payable in 2018. The deal is subject to customary regulatory approvals and is expected to close in the first quarter of 2016. Motorola Solutions will fund the transaction with a combination of offshore cash, which was $844 million at Oct. 3, 2015, and bank financing.

The acquisition should add more than $550 million of higher profit margin annual revenues with minimal capital intensity. Consequently, Fitch expects high single digit top line growth in 2016, despite continued currency and macroeconomic headwinds, and low single digit growth over the intermediate-term. Fitch expects roughly 300 basis points of operating EBITDA margin expansion to the mid-20s versus a Fitch estimated 22.9% for the latest 12 months (LTM) ended Oct. 3, 2015 from the addition of Airwave and Motorola Solution's ongoing restructuring.

Fitch estimates total leverage (total debt to operating EBITDA) could range from 3.5x - 4.0x at closing, depending upon the amount of bank debt used to fund the transaction, versus a Fitch estimated 3.3x for the latest 12 months (LTM) ended Oct. 3, 2015. However, Fitch expects the company will use free cash flow (FCF), which Fitch estimates will exceed $500 million annually over the intermediate-term, for debt reduction over the post-closing near-term.

KEY RATING DRIVERS

Fitch Revised the Rating Outlook to Negative on Aug. 5, 2015 following Motorola Solutions use of debt to support a $2 billion tender offer and potential for weakened credit protection measures beyond the short-term. The company announced the tender offer in connection with Silver Lake Partners' (SLP) $1 billion investment in Motorola Solutions in an effort to accelerate the identification of efficiencies and acquisitions targets in focus managed services and service attach businesses.

Prior to the tender offer, Fitch anticipated more moderated share repurchases to reduce excess cash through 2016, providing headroom for operational shortfalls or organically fund smaller acquisitions, while maintaining total leverage below 3x. Nonetheless, Motorola Solutions' growing backlog, particularly in services, in conjunction with expectations for operating EBITDA margin expansion from the addition of Airwave and restructuring should enable the company to reduce total leverage to the mid-2x in the near-term.

Ratings concerns include:

--Expectations for debt financed acquisitions, as part of the company's strategy to increase services attach rates, given reduced cash balances and history of using pre-dividend FCF for shareholder returns;

--Low single digit organic revenue growth profile, given mature growth rates and funding constraints associated with government markets; and

--Smaller scale and reduced diversification following divestitures over the last several years as a pure play provider of public safety solutions.

Motorola Solutions' ratings are supported by:

--Lower operating volatility from more consistent government and public safety aggregate demand following the sale of the Enterprise business at the end of 2014;

--Leading market positions in Public Safety and Enterprise markets, driven by significant installed base, investment and technology leadership and brand name; and

--Expectations for structurally higher profitability and annual FCF from lower fixed costs related to restructuring and the addition of Airwave.

KEY ASSUMPTIONS

--Low single digit negative revenue growth in 2015, driven mainly by currency headwinds. Strength in the U.S. and Middle East regions will offset significant macroeconomic weakness, particularly in Russia and Brazil, resulting in slightly positive organic constant currency growth.

--Flat revenue growth in 2016, excluding the Airwave acquisition, driven by the continuation of current demand patters. Airwave adds more than $550 million of annual revenues that could be pressured by potential pricing concession related to the acquisition.

--Low single digit positive revenue growth resumes in 2017, driven by growing backlog.

--Fitch anticipates restructuring and addition of Airwave will drive operating EBITDA margin to the mid-20s.

--Nominal dividends are roughly flat in 2016, from per share growth offsetting lower share count following significant stock buybacks over recent years.

--Share repurchases are limited to offsetting dilution in 2016 and domestic FCF and cash repatriated to the U.S. beyond 2016.

--Motorola Solutions uses FCF for debt reduction until total leverage returns to mid-2x.

RATING SENSITIVITIES

Fitch could stabilize the ratings at 'BBB' if Motorola Solutions uses FCF for debt reduction in 2016, resulting in Fitch's expectations for sustained total leverage near 2.5x. Beyond this, Fitch does not anticipate positive rating actions, given the company's commitment to using FCF for share repurchases and potential for additional debt financed acquisitions.

Negative rating actions could result from:

--Fitch's expectation that total leverage will remain above 2.5x, driven by the use of FCF for share repurchases or debt-financed acquisitions; or

--Expectations for sustained negative revenue growth from competitor-driven pricing pressures or structurally lower aggregate funding due to budget constraints resulting in annual FCF near $250 million.

LIQUIDITY

Fitch believes Motorola Solutions' liquidity was solid as of Oct. 3, 2015 and supported by:

--$2.2 billion of cash and cash equivalents, of which $1.4 billion was in the U.S.; and

--$2.1 billion undrawn RCF expiring May 2019.

Fitch's expectation for more than $500 million of annual FCF through the intermediate-term also supports liquidity. Beyond bank debt raised to fund Airwave, Motorola Solutions' next significant maturity is in 2021.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings:

Motorola Solutions

--Long-term IDR at 'BBB';

--Senior unsecured RCF at 'BBB';

--Senior unsecured notes at 'BBB'.

The Rating Outlook is Negative.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995935

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995935

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
William Densmore
Senior Director
+1-312-368-3125
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
William Densmore
Senior Director
+1-312-368-3125
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com