S&P Assigns 'BB-' Rating to Zebra Technologies (ZBRA)

Standard & Poor's Ratings Services assigned its 'BB-' corporate credit rating to Lincolnshire, Ill.-based Zebra Technologies (Nasdaq: ZBRA). The outlook is stable.

At the same time, we assigned a 'BB+' issue-level rating to the company's proposed $2 billion senior secured term loan due 2021 and $250 million revolving credit facility due 2019; the '1' recovery rating indicates our expectation for very high recovery (90% to 100%) of principal in the event of payment default. We also assigned a 'B' issue-level rating to the company's proposed $1.25 billion senior unsecured notes due 2022; the '6' recovery rating indicates our expectation for negligible recovery (0% to 10%) of principal in the event of payment default.

"The ratings reflect our view of the Enterprise business's inconsistent operating performance and near-term integration risk, partially offset by the good track record of the legacy Zebra business and the leading market positions of the combined company," said Standard & Poor's credit analyst Christian Frank. "The ratings also incorporate our view that leverage is likely to fall below 5x during 2015 as the company realizes cost savings and repays debt."

Our view of Zebra's business risk profile incorporates the inconsistent track record of the Enterprise business, the integration risk associated with this transformational acquisition, the combined company's narrow focus on the supply chain technology hardware market, and its exposure to cyclical retail and manufacturing investment spending. Partially offsetting these factors are the company's leading market positions in specialty printing, enterprise mobile computing, and data capture solutions; the good operating track record of the legacy Zebra business with consistent revenue growth and profitability; and good channel partner relationships. We believe that the complementary nature of the Enterprise products and Zebra's unique knowledge of the company from years of coordinating product roadmaps mitigate some of the integration risk.

Zebra's financial risk profile is characterized by leverage in the mid-5x area pro forma for the acquisition based on the 12 months ended June 2014, which we expect to fall below 5x in 2015 as the company reduces expenses and uses its free operating cash flow (FOCF) to repay debt. We believe that the company will limit its acquisition activity, reduce share buybacks, and allocate most of its FOCF for debt repayment over the next 12 to 24 months.

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