NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed Newell Rubbermaid Inc.'s (Newell) 'BBB+' long term Issuer Default Rating (IDR) and F2 short term IDR on Rating Watch Negative upon today's announcement that it will acquire Jarden Corporation (Jarden) for about $20 billion including assumed debt. The acquisition will be funded by Newell shares and approximately $10 billion in new debt issuances. The new debt will be also be used to refinance Jarden's debt.
Fitch anticipates a two-notch downgrade to 'BBB-' upon completion of the acquisition. Newell will have meaningfully higher leverage for two to three years and higher-than-normal execution risk in achieving $500 million in synergies given Jarden's highly decentralized business profile. The transaction is pending regulatory approvals and other customary conditions but is expected to close in the first half of 2016.
A full list of rating actions follow at the end of the release.
KEY RATING DRIVERS
Improved Business Profile
Fitch has previously cited Newell's effort to reshape its portfolio towards businesses and categories with higher margins, less cyclicality or better revenue growth prospects as a credit positive. The Jarden acquisition provides several of these attributes.
The acquisition will markedly reduce the cyclicality in Newell's portfolio. The company had several quarters of double-digit revenue decline with higher leverage in the last recession, though metrics and performance bounced back about a year later.
Fitch expects initial pro forma leverage near 5.5x including combined debt issued in fourth quarter 2015 to close several acquisitions, but leverage should trend to under 3.5x by the end of 2018 assuming underlying trends remain strong and targeted synergies are realized. The company is committed to using the strong cash generation from the combined entity to reduce debt.
Newell has historically operated with leverage in the 2.5x range but has now publicly committed to operate in the range of 3.0x-3.5x, which is essentially a change in financial policy. The rationale for the previous the 2.5x level was necessitated by the company's more cyclical profile. The business profile will improve markedly, but Fitch notes there would be little flexibility in the ratings if gross leverage were managed at 3.5x and business trends came in worse than expected.
Scale and Strong Free Cash Flow (FCF) Generation
With $16 billion in pro forma revenues, the combined companies will have scale with both vendors and customers, particularly in international markets. Jarden is a cross-selling enterprise and could bring additional benefits by gaining new distribution and vice versa.
Fitch views the increased diversification of the product portfolio as positive; however, there is some concern related to the potential impact of SKU proliferation given Jarden's 120+ brands (ranging from plastic cutlery to snow skis) on Jarden's much lower cash conversion cycle and thus a negative impact on Newell's working capital.
Nonetheless, both companies have had strong FCF margins in the 5%-6% range over the past three years and the combined company should generate nearly $1 billion in FCF annually, absent higher interest expense.
Vastly Different Operating Models
Jarden is a highly decentralized and entrepreneurial sales enterprise which grew via acquisitions from approximately $300 million in 2001 to a pro forma $10 billion with several large acquisitions this year. It is a holding company with a relatively hands-off management style over the myriad of companies and management teams purchased over the years.
Newell, on the other hand, operates under a centralized business model, raising the possibility of a conflict in business approaches that could hinder integration. As a result, integration activities to achieve synergies have to be more thoughtful than most combinations to avoid meaningful disruption or loss of business.
Fitch's key assumptions for Newell on a standalone before the Jarden acquisition include:
--Newell maintains SG&A/Sales in the 25% range, and gross margins remain near current levels.
--Mid-singledigit organic growth and contributions from late 2014 acquisitions are expected to fully offset currency pressure and lead to meaningful improvement in FCF to the $350 million to $400 million level in 2015-2016, compared to an average of $287 million over the past four years.
--Barring meaningful acquisitions and/or shareholder-friendly actions, Fitch expects that the company can sustainably operate with leverage of 2x-2.3x and should be in this range after 2016.
Fitch's key assumptions for Newell on a combined basis with Jarden include:
--Pro forma revenue around $16 billion in 2016 growing approximately 3% in 2017 and 5% in 2018, and 2018 EBITDA margin of 19.5% assuming synergies are realized
--Initial leverage of near 5.5x, trending down to under 3.5x both on EBITDA growth and debt reduction by 2018.
--FCF generation of nearly $1 billion annually in 2017 and 2018.
Negative: Fitch anticipates that any downgrade would likely be limited to two notches once the acquisition closes. Future developments that may individually or collectively, lead to a negative rating action include:
Marked and sustained declines in organic revenue to 1% or less in the near term could be an early indication of internal issues with integration of the two businesses. Organic sales have been particularly healthy for both companies and in the 5% rate recently with sector organic growth rates in the 2% to 5% range.
Failure to achieve the targeted $500 million of synergies in a timely manner as well as lack of significant debt reduction such that leverage of 3.5x or less is not achieved by the end of 2018.
Positive: Fitch does not anticipate a positive rating action in the near term. However, positive ratings momentum could result from a commitment to operating with leverage under 3x while maintaining strong business momentum as exemplified by organic growth rates in the 2% to 5% range.
FULL LIST OF RATING ACTIONS
Fitch has placed the following ratings on Negative Watch.
--Long-term Issuer Default Rating (IDR), 'BBB+';
--$800 million revolving credit facility, 'BBB+';
--Senior unsecured notes, 'BBB+';
--Short-term IDR, 'F2';
--Commercial paper, 'F2'.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)