Fitch Rates Abbott's Notes Offering 'A(EXP)'; Rating Watch Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A(EXP)' rating with a Negative Rating Watch to Abbott Laboratories' (ABT, Abbott) notes offering. The net proceeds are expected to be used to fund the company's acquisition of St. Jude Medical Inc. (STJ, St. Jude). Abbott is also in the process of potentially acquiring Alere Inc. (Alere).

Fitch will resolve the Rating Watch as more details regarding the transaction become available. Fitch expects to downgrade Abbott to 'BBB'/'F2'.

A full list of ratings follows the end of this release.

KEY RATING DRIVERS

--St. Jude is a good strategic fit, but the acquisition will significantly stress leverage for at least two years with or without the acquisition of Alere.

--Abbott's diversified product portfolio is positioned to deliver mid-single-digit organic growth with the acquisition(s) and on a standalone basis.

--Fitch anticipates that Abbott's efforts to improve operating margins will continue to yield results through organic improvements in sales mix and cost control plus integration-related synergies.

--Fitch forecasts Abbott generating positive free cash flow (FCF) excluding the near-term negative effect of one-time acquisition/integration related costs.

--Fitch expects the company's Nutrition, Diagnostics and Established Pharmaceuticals segments to benefit from the growth in emerging markets.

--Abbott's ongoing focus on new product introductions across virtually all of its business segments bodes well for growth and margins.

--The company faces challenges regarding reimbursement for some of its products, as well as near-term adverse foreign exchange movements and select international economic stress.

--Fitch expects that Abbott will maintain adequate liquidity through cash generation, bank credit and access to the capital markets.

Sound Acquisitions/High Leverage: Abbott's planned acquisitions of St. Jude and Alere are good strategic fits. Both expand Abbott's market presence in segments that the company currently operates, by providing the company with broader product offerings. The acquired portfolios, in aggregate, will also offer organic growth potential. Abbott should be able to realize the combined forecasted pre-tax synergies (from St. Jude and Alere) of roughly $800 million within four years of the acquisitions. The equity value of the St. Jude transaction is approximately $25 billion ($46.75 in cash and 0.8708 shares of Abbott common stock per share of St. Jude) plus roughly $5.7 billion assumed net debt. Abbott intends to acquire Alere for $5.8 billion cash (equity value) and around $2.6 billion of assumed net debt.

The two acquisitions will significantly increase debt, with leverage forecasted to remain above 3.0x through 2019. Without the Alere acquisition, forecasted leverage would likely remain at or above 3.0x through 2018. Fitch expects Abbott will reduce leverage to durably below 3.0x thereafter, through a combination of debt reduction and increased EBITDA. Operating margins will likely improve because of favorable shifts in sales mix, good cost control and synergies. FCF should stay significantly positive (excluding one-time restructuring costs). The potential BBB'/'F2' post-transaction rating assumes Abbott will pursue a more conservative approach to capital deployment, with share repurchases, dividend increases and acquisitions remaining modest.

The transaction is likely to close near year-end 2016 pending regulatory approvals. The addition of St. Jude's products will significantly expand Abbott's medical device portfolio, particularly in the area of cardiovascular disease. The deal will position Abbott as the number-one or number-two player in many of the sub-segments of the cardiovascular device market. The combination provides minimal overlap in product categories and offers Abbott a larger presence in the faster growing device areas of atrial fibrillation, structural heart and neuromodulation.

Abbott estimates that it will realize roughly $500 million in annual synergies by 2020 from the St. Jude acquisition. Broader portfolios within the sub-segments of cardiovascular should provide Abbott with increased contracting/shelf space opportunities when contracting with hospital management and purchasing groups. Cost-related synergies in the areas of sourcing plus some overlap in sales force and administrative functions should be attainable. In addition, Abbott has a demonstrable record of accomplishment of acquiring and successfully integrating acquisitions.

Alere Expands Point-of-Care Diagnostics: Fitch believes the acquisition of Alere makes sense strategically, as the combination will increase Abbott's presence in point-of-care diagnostics and prospects to expand Alere's products into international markets. Abbott already has a strong position in the medical diagnostics market. The point-of-care segment of the diagnostics market will likely grow faster than the in vitro diagnostic market during the intermediate term. The company also expects to achieve nearly $300 million in pre-tax synergies by 2019 and more thereafter.

Durable Margin Improvement: Abbott will likely focus on improving margins through cost control and generating a favorable shift in sales mix. In addition to securing the forecasted acquisition-related synergies, Fitch looks for Abbott to continue driving efficiencies across its business segments. Innovative, value-added product launches should be able to secure attractive pricing. Fitch expects margin improvements will be durable during the intermediate term.

Stable Operations Prior/Post Acquisition: Fitch forecasts that Abbott's diversified product portfolio (with or without the two acquisitions) will continue to produce mid-single-digit organic growth in the intermediate term, given the strength of its product offerings and its geographic mix. However, adverse foreign exchange movements will likely hamper reported growth in the near term, although margins should remain moderately insulated from the trend. Revenue growth and margin support should provide for solid FCF generation.

Positive FCF/Conservative Capital Deployment: Fitch estimates that Abbott will generate normalized FCF in 2018 and 2019 of roughly $1.5 billion to $1.6 billion, with one-time transaction-related costs hampering FCF before then. Forecasted revenue growth and moderately improving margins will drive cash generation. Capital expenditures and dividends incrementally increase during the forecast period, as the company focuses on strengthening its balance sheet and credit profile. FCF should be sufficient to fund debt reduction, modest share repurchases and small acquisitions.

Select Market Headwinds: Abbott faces a few challenges in select geographic markets, including restrictive reimbursement rates for diabetic supplies and infant nutritionals in the U.S. Unfavorable foreign exchange rate movements and economic stress in Venezuela will likely hamper reported top-line growth. However, foreign exchange affects margins less than reported revenues because the company has significant operations (costs) in some geographies that are experiencing currency devaluation.

Emerging Markets Supporting Growth: Fitch expects a significant portion of Abbott's growth will come from emerging markets, fueled by favorable demographics, economic growth. Nutrition, Diagnostics and Established Pharmaceuticals, in particular, should benefit from the rapidly growing middle class in these markets. Consumer out-of-pocket purchases account for a large portion of revenues in these markets. This contrasts to developed markets, where the vast majority of purchases involve third-party payers. As such, rising disposable income is an important driver of demand in these markets.

New Product Flow: Abbott continues to refresh its product portfolio across all of its business segments, helping to drive growth through market expansion and/or market penetration. Newer products with improved efficacy and safety profiles often garner value-added prices, offering support for margins. Many of the company's launches are tailored to specific geographies. Fitch expects the potential addition of Alere's and St. Jude's pipelines will further support innovative product introductions over the long term.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Abbott Laboratories (excluding the St. Jude acquisition) include:

--Leverage to increase significantly in the near to intermediate term, if the Alere acquisition is completed.

--Mid single-digit organic revenue growth with organic growth offset by negative foreign exchange rate effects.

--Incrementally improving margins, particularly in Nutritional Products and Diagnostics, given Abbott's efforts to improve efficiencies in these two segments.

--Modest annual FCF (cash flow from operations minus capital expenditures minus dividends) during 2016 but significantly improving throughout the forecast period.

--Continued share repurchases and dividend increases.

RATING SENSITIVITIES

Fitch will resolve the Rating Watch once more details regarding the transaction are available. However, given the currently available information and assuming Abbott acquires both Alere and St. Jude, Fitch expects that Abbott's ratings would likely move to 'BBB'/'F2'.

The following rating sensitivities exclude the potential acquisition of St. Jude:

--Leverage to increase significantly in the near to intermediate term, if the Alere acquisition is completed.

--Mid-single digit organic revenue growth with organic growth offset by negative foreign exchange rate effects.

--Incrementally improving margins in Nutritional Products and Diagnostics as well other areas within the firm.

--Continued share repurchases and dividend increases.

LIQUIDITY

Adequate Liquidity: Fitch expects Abbott to maintain adequate liquidity, as it will term out all of its and STJ's short-term borrowings ($3.5 billion- $4 billion) and ultimately end up with full availability on its $5 billion revolving credit facility that expires in July 2019 and availability on its CP program.

FULL LIST OF RATING ACTIONS

Fitch maintains the following ratings on Negative Watch:

Abbott Laboratories

--Long-Term IDR 'A';

--Bank credit facility 'A';

--Senior unsecured debt 'A';

--Short-Term IDR 'F1';

--Commercial paper program 'F1'.

Relevant Committee Date: April 27, 2016

Fitch has made no material financial adjustments that are not disclosed within the company's public filings.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

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