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Fitch Places Thermo Fisher, Life Tech Ratings on Negative Watch after Announcement of $13.6B Deal

NEW YORK (GenomeWeb News) – Fitch Ratings placed the ratings of Thermo Fisher Scientific and Life Technologies on Rating Watch Negative following Thermo Fisher's announcement on Monday that it plans to buy Life Tech for $13.6 million.

Thermo Fisher's ratings that were placed on Rating Watch Negative include the company's long-term issuer default rating, which is rated BBB+; short-term IDR, rated F2; senior notes, rated BBB+; and commercial paper, rated F2.

Life Tech's ratings, which previously were placed on Evolving Watch, but now are on Rating Watch Negative, include IDR, rated BBB; senior unsecured credit facility, rated BBB; and senior unsecured notes, rated BBB.

In placing Thermo Fisher on Negative Watch, Fitch said that the funding of its acquisition of Life Tech is expected to pressure the Waltham, Mass.-based company's credit profile, leading to a downgrade of its ratings. Several factors will affect Thermo Fisher's credit profile after the completion of the deal, such as the amount of debt Thermo Fisher will use to fund the deal. Fitch said it anticipates the company will use a combination of debt and equity financing.

Also influencing Thermo Fisher's credit profile will be the pricing of the debt used to fund the deal, the operational risks involved in integrating Life Tech, and potential upside to financial results realized through synergies.

Lastly, Thermo Fisher's plans to apply cash to reduce debt in the 12 to 18 months following the deal will impact its credit profile, Fitch said.

The ratings firm added that it believes Thermo Fisher will maintain debt at above 2.5x for an extended period, resulting in a likely one- or two-notch downgrade of its ratings.

In the meantime, it said that it believes Thermo Fisher will maintain investment-grade ratings and that the acquisition will be funded so that Life Tech will keep a rating of at least BBB-, as a result. Assuming Thermo Fisher uses equity to fund a portion of the deal and aggressively reduces debt through free cash flow, "an affirmation of the BBB rating on Life Tech's notes is a possibility," said Fitch. "If there is a reasonable expectation that leverage will drop to around 3.0x within the 18-month window following closing, the credit profile would be consistent with a BBB rating."

Commenting on the deal, Fitch said there is a "strong strategic rationale" for the transaction, and noted that Life Tech's primary end markets — including the academic, government, and biopharmaceutical research settings — overlap significantly with Thermo Fisher's.

Life Tech has diversified its product portfolio and expanded into the hospital/clinical and commercial end markets, and has "decent growth potential" in the clinical end market as a result of its next-generation sequencing business. Fitch said, though, that adoption of NGS in the clinical markets is in the nascent stages, and risks remain related to regulatory and government approvals necessary to support wider adoption of the technology in clinical settings.

NGS technology, which Thermo Fisher does not currently have, will complement its portfolio of diagnostic products, Fitch added.