S&P Places Danaher's (DHR) Ratings on CreditWatch Negative Amid Move to Acquire Cepheid
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S&P Global Ratings placed its ratings on Danaher Corp. (NYSE: DHR), including the 'A' corporate credit and 'A-1' commercial paper rating, on CreditWatch with negative implications, following its pending acquisition of Cepheid Inc. for $4 billion.
"The CreditWatch placement reflects our view that the timing of Danaher's proposed $4 billion debt-financed acquisition of Cepheid and the high acquisition multiple may manifest a shift toward a more aggressive financial policy than we previously expected resulting in leverage maintained above 2.5x," said S&P Global Ratings credit analyst Maryna Kandrukhin. Our 'A' corporate credit rating on Danaher reflects our projection that in 2016 the company would use all internally generated cash flow and dividends from Fortive Corp. to repay debt and reduce leverage below 2.5x. Although we generally expect Danaher to remain acquisitive, we projected in our base case for 2016--the year of the transformative Fortive spin-off--that Danaher would temporarily suspend, or at least limit, its acquisition activity and focus on reducing leverage. Instead, only two months after the completed spin-off, Danaher is proposing to acquire Cepheid in a $4 billion debt-funded transaction.
We think Cepheid's product portfolio will be a good complement to Danaher's diagnostics business and believe Danaher has a strong potential to improve Cepheid's profitability by leveraging its existing large diagnostics platform. At the same time, while we expect the transaction will add around $700 million to Danaher's 2017 topline, we also project it will add almost an entire turn of leverage because we expect Cepheid's 2017 EBITDA contribution to be very limited. We estimate the acquisition will elevate Danaher's 2017 leverage to 2.8x, in contrast to our previously projected leverage of 2.0x at the end of 2017. While our base case calls for further delevering to 2.5x in 2018, we don't have full confidence in the company's commitment to maintaining leverage below 2.5x.
We will meet with Danaher's management to further clarify the company's acquisition strategy, leverage target, and debt reduction plans. Should we conclude that Danaher's financial policy has become more aggressive and the company is unlikely to maintain long-term leverage ratio below 2.5x, we may lower the corporate credit rating by one notch to 'A-' and the commercial paper rating to 'A-2'.
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