Moody's Places Open Text (OTEX) Ratings on Review for Downgrade

Moody's Investors Service ("Moody's") placed all of Open Text Corporation's (NASDAQ: OTEX) credit ratings, including its Ba1 corporate family rating (CFR), on review for downgrade. The review was prompted by the company's announcement that it entered into an agreement to acquire certain software assets from EMC Corporation (a subsidiary of Dell, Inc., Ba1, stable) for $1.65 billion of cash consideration. There is no publicly available information on the acquired assets and details of the final capital structure have not been disclosed. The transaction is expected to close in the next 90-120 days. The SGL-1 speculative grade liquidity rating is unchanged but may be lowered depending upon the company's expected liquidity position upon the close of the acquisition.

Ratings Rationale

Open Text plans to finance the acquisition with a combination of cash on hand, debt and equity. If the company raises equity to finance a significant portion of the purchase price, the Ba1 CFR will likely be confirmed. In a scenario where the company funds the acquisition with just cash on hand and new debt, the Ba1 CFR could face downward pressure. However, in such case Moody's would evaluate the company's ongoing commitment and capacity to de-lever, which could mitigate downward rating pressure. Negative ratings movement related to the CFR, if any, would be limited to one notch.

The review will focus on the final capital structure, analysis of the acquired assets, integration challenges and prospects of the combined companies. The combination will enhance Open Text's position in the Enterprise Content Management and Life Cycle Management software markets. The software assets being acquired from EMC, which includes the well regarded Documentum assets, also brings particular strength in certain vertical markets including healthcare, banking, insurance, oil & gas and utilities. The companies are competitors however and merging the cultures and designing a unified product roadmap will be critical to the success of the integration.

Open Text has made over $3 billion of acquisitions since 2005 and although the company does not break out results of acquired companies, EBITDA margins have increased to 35% from 17% over this period.

The following ratings were affected:

On Review for Downgrade:

..Issuer: Open Text Corp.

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba1-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba1

....Senior Secured Bank Credit Facility, Placed on Review for Downgrade, currently Baa2

....Senior Unsecured Regular Bond/Debentures, Placed on Review for Downgrade, currently Ba2

Outlook Actions: ..Issuer: Open Text Corp.

....Outlook, Changed To Rating Under Review From Stable

The principal methodology used in these ratings was Software Industry published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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