S&P Lowers Outlook on Tech Data (TECD) to Negative; Ratings Affirmed
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S&P Global Ratings said that it affirmed its 'BBB-' corporate credit rating on Tech Data Corp. (Nasdaq: TECD) and revised the rating outlook to negative from stable.
At the same time, we assigned our 'BBB-' issue-level rating to the company's proposed senior unsecured credit facility, which consists of a $1 billion term loan A and a $1 billion revolving credit facility (we expect the revolver will be mostly undrawn at the transaction's closing), as well as its $500 million five-year and $500 million 10-year senior unsecured notes.
"Tech Data's proposed acquisition of Avnet Inc.'s Technology Solutions business results in pro forma leverage of about 3x as of July 31, 2016," said S&P Global Ratings' credit analyst John Moore. "Although Tech Data's credit measures will weaken from the proposed transaction, we expect the acquisition to expand the company's computing hardware distribution business by lowering its geographic revenue concentration in Europe and increasing its penetration into Asia-Pacific markets." The transaction provides Tech Data with a more diverse overall end-product offering that will include a higher revenue allocation from datacenter enterprise products (45% of total revenues pro forma for the transaction versus 29% pre-acquisition) and less revenue to broad-line personal computing and wireless device products (48% pro forma revenues versus 61% pre-acquisition). We also expect that Avnet's higher-margin service offerings will increase Tech Data's EBITDA margins by 50 basis points to 100 basis points in 2017 and 2018.
We expect that Tech Data will continue to retain significant vendor concentration, with Apple Inc. and HP Inc. each continuing to represent about 10%-15% of revenues in 2016 and 2017. Overall, we continue to view Tech Data as benefitting from its established market position as a global distributor of IT products in a concentrated hardware original equipment manufacturer (OEM) market and as a critical link within the technology products supply chain, especially in diffuse small and medium business markets.
The negative outlook reflects our expectation that, pro forma for the acquisition, Tech Data's leverage will increase to about 3x, its computing distribution end markets will remain volatile, and potential acquisition integration risks may slow its deleveraging in 2017 and 2018.
We could lower our corporate credit rating on Tech Data if the company experiences increased competition, more volatile end-market conditions, or adopts a more aggressive financial policy, such that leverage doesn't decline below 3x in 2018.
We could revise the outlook to stable if the company's integration of Technology Solutions results in steady to improving operating performance, with leverage sustaining below 3x.
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