Fitch Places Abbotts's Ratings on Negative Watch

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has placed Abbott Laboratories' (Abbott) ratings on Negative Rating Watch following its announced intention to acquire Alere, Inc. (ALR).

Abbott had $8.4 billion in outstanding debt at Sept. 30, 2015. A full list of Fitch's ratings actions follows at the end of this release.

KEY RATING DRIVERS

Sound Acquisition, Increased Leverage: Abbott plans to acquire ALR for roughly $5.8 billion cash and approximately $2.6 billion of assumed net debt. The company intends to finance the transaction with debt. Fitch believes the acquisition makes sense strategically, as the acquisition will increase Abbotts's presence in point of care diagnostics and has prospects to expand Alere's products in international markets. Abbott already has a strong position in the medical diagnostics market and a demonstrable record of successfully acquiring and integrating acquisitions.

Abbott expects to achieve nearly $500 million in pre-tax synergies in 2019, and more thereafter. Despite the favorable strategic and operational aspects of adding Alere's products to Abbott's existing portfolio, Fitch expects leverage to increase significantly because of the transaction. Pro forma leverage could approach or exceed 3x immediately after the acquisition close, if Abbott does not pay down any debt beforehand. As such, the degree to which and the pace at which the company deleverages will factor heavily in Fitch's rating determination for Abbott. A downgrade could occur if leverage does not decrease to below or around 2x within 18-24 months after the deal closes. Based on its operating forecast for the combined company, Fitch believes Abbott will generate enough free cash flow (FCF) to accomplish this level of debt reduction, but uncertain as to the company's commitment to deploy capital for this purpose.

Stable Operations: Fitch forecasts that Abbott's diversified product portfolio will continue to produce low- to mid-single-digit organic growth in the intermediate term, given the strength of its product offerings and its geographic mix. However, adverse foreign exchange movements will likely hamper reported growth in the near term. Revenue growth and relatively stable margins should provide for solid FCF generation.

Emerging Market Tailwinds with Some Headwinds:

Fitch expects the majority of Abbott's growth will continue to come from emerging markets. Abbott will generate roughly 50% of its revenues from emerging markets in 2016, due to strong demand-driven growth in those markets. Nutrition, Diagnostics and Established Pharmaceuticals, in particular, should benefit from the rapidly growing middle class in these markets, and nearly all purchases are paid for by consumers. This is in contrast to developed markets, where the vast majority of purchases of prescription pharmaceuticals, clinical diagnostic tests and medical devices involve third-party payers. As such, rising disposable income is an important driver of demand in these markets.

Abbott faces a few challenges in select geographic markets, including restrictive reimbursement rates for diabetic supplies in the U.S. and macroeconomic distress in Venezuela. Restrained budgets in Europe pose headwinds, although they appear to be moderating. Unfavorable foreign exchange rate movements will likely continue to hamper reported top-line growth in the near term. However, the negative effect on margins is muted given that the company has significant operations (costs) in the same geographies that are experiencing currency devaluation.

New Product Flow: Abbott continues to refresh its product portfolio across all of its business segments, helping to drive growth through market expansion and/or market penetration. Newer products with improved efficacy and safety profiles often garner value-added prices, offering support for margins. The company often launches new products that are tailored to specific geographies.

Durable Margin Improvement

Fitch anticipates that Abbott will continue to focus on driving efficiencies across its business segments, in an effort to improve margins. The company made progress in improving the cost structure in its Nutrition and Diagnostic segments, while also taking out some general and administrative corporate costs. Fitch believes the margin improvements are largely sustainable over the intermediate term and bode well for cash generation and debt leverage.

Solid FCF: Fitch estimates that Abbott will generate solid cash flow of at least $1 billion in 2016, driven by incremental organic revenue growth and moderately improving margins. Capital expenditures and dividends are expected to steadily increase during the forecast period as the company invests for growth. FCF should be sufficient to fund what Fitch expects will be moderate share repurchases and increasing dividends.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Abbot Laboratories include:

--Leverage to increase significantly in the near- to intermediate-term, if the Alere acquisition is completed.

--Low single-digit reported revenue growth with organic growth offset by negative foreign exchange rate effects.

--Incrementally improving margins, particularly in Nutritional Products and Diagnostics, given Abbott's efforts to improve efficiencies in these two segments.

--Annual FCF (cash flow from operations minus capital expenditures minus dividends) of at least $1 billion during 2016.

--Continued share repurchases and dividend increases.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Debt above around 2x EBITDA within 18-24 months after the Alere acquisition;

--Significant operational stress, which may include an inability to successfully integrate the planned Alere acquisition and achieve expected synergies;

--Resulting FCF weakens to a level where the company cannot meaningfully reduce debt following the Alere acquisition.

Positive: Fitch does not anticipate an upgrade in the near- to intermediate-term.

LIQUIDITY

Fitch expects Abbott to maintain adequate liquidity, as the company had approximately $6.1 billion in cash and short-term investments at Sept. 30, 2015. The company has an unused $5 billion revolving credit facility that expires in July 2019, although Abbott had roughly $2.4 billion in short-term borrowings backed by the credit facility. Abbott generated approximately $809 million in FCF during the latest 12-month period ended Sept. 30, 2015. In addition, the company should continue to have ample access to public debt markets.

At March 31, 2015, Abbott had approximately $8.4 billion in debt outstanding (including the $2.4 billion in short-term borrowings). Fitch believes the company's debt maturities are manageable, with no significant maturities until 2019.

FULL LIST OF RATING ACTIONS

Abbott Laboratories

Fitch has placed the following ratings on Negative Watch:

--Long-term IDR 'A';

--Bank loan rating 'A';

--Senior unsecured debt rating 'A';

--Short-term IDR 'F1';

--Commercial paper program 'F1'.

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

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998900

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160202006646/en/

Fitch Ratings
Primary Analyst
Bob Kirby, CFA, +1-312-368-3147
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger, CFA, +1-212-908-0501
Managing Director
or
Committee Chairperson
David Peterson, +1-312-368-3177
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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