Siemens Ratings Affirmed at Fitch Amid Move to Acquire Mentor Graphics (MENT)

Fitch Ratings says Siemens AG's (A/Stable) ratings are not affected by the German engineering group's USD4.5bn acquisition of US-based Mentor Graphics Inc. Fitch believes Siemens's strong free cash flow (FCF) generation provides enough rating headroom following the acquisition. The transaction is expected to close by 3Q17 subject to Mentor Graphics' shareholder approval.

Fitch believes Siemens' credit profile will remain in line with its ratings after the acquisition. We expect the modest negative impact on leverage will be mitigated by strong internal FCF generation (around 3% of revenues expected in 2017-2019), and further potential cash inflow through portfolio realignments like the planned IPO of the healthcare business. Fitch forecasts that funds from operations adjusted gross leverage will remain below 1.5x in the medium term, which is commensurate with the rating.

The acquisition of Mentor supplements and improves Siemens's digital growth strategy following the USD1bn acquisition of simulation software supplier CD-Adapco this year. Fitch views Siemens management's focus on expanding its digital presence as a long-term credit positive, reducing the gap between its large US peers. The group's Digital Factory segment has been delivering strong double digit EBIT margins in the past few years, compared with single digit EBIT margins in traditional industrial sectors.

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