Rating Action: Moody's affirms Baa1 senior unsecured of Analog Devices following Maxim acquisition agreement; outlook stable
Global Credit Research - 13 Jul 2020
NOTE: On July 13, 2020, the press release was corrected as follows: The second paragraph was changed to In addition to the acquisition's strong strategic fit, the rating is supported by governance considerations, specifically a conservative leverage policy that targets net debt to EBITDA (company calculated) of less than 2x and our expectation for a balanced capital allocation policy over the longer term. Revised release follows.
New York, July 13, 2020 -- Moody's Investors Service ("Moody's") affirmed Analog Devices, Inc.'s ("Analog") Baa1 senior unsecured rating following today's announcement that it will acquire Maxim Integrated Products, Inc. ("Maxim") in an all-stock transaction that values the combined enterprise at over $68 billion. The credit positive transaction, unanimously approved by the Board of Directors of both companies, will strengthen Analog with increased breadth and scale across multiple end markets. Subject to regulatory approvals, the transaction is expected to close in mid-2021. Upon closing, current Analog shareholders will own approximately 69 percent of the combined company, while Maxim stockholders will own approximately 31 percent. The outlook remains stable.
In addition to the acquisition's strong strategic fit, the rating is supported by governance considerations, specifically a conservative leverage policy that targets net debt to EBITDA (company calculated) of less than 2x and our expectation for a balanced capital allocation policy over the longer term.
..Issuer: Analog Devices, Inc.
....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1
..Issuer: Analog Devices, Inc.
....Outlook, Remains Stable
The acquisition would combine two very profitable analog semiconductor companies with complementary technologies, products, and capabilities, solidifying Analog's very strong position in the high performance analog market, with $7.7 billion of combined revenue and $3.3 billion of EBITDA as of the LTM period ending the first calendar quarter of 2020. Reflecting very high quality earnings and efficient business models, the combined companies convert over 80% of EBITDA into cash flow after capital spending. Both companies have strong positions in very diversified end markets with Maxim having relative strength in automotive and data center markets, while Analog excels across the broad industrial, optical communications and digital healthcare markets. The combined entity will have highly differentiated products across similar end-markets in industrial (44% of combined revenue in the most recent quarter), communications (22%), automotive (19%), and consumer (13%).The ratings are constrained by semiconductor industry cyclicality, although less pronounced with broadening end markets, strong although fairly predictable competition from analog semiconductor players and integration risks related to the Maxim acquisition.
In addition to modest cost synergy expectations ($275 million) that Moody's views as achievable, the broader portfolio and revenue base over which the company will be able to leverage research and development spending, should improve profit margins and cash flow from already strong levels. Moody's projects leverage will be modest at closing, with adjusted gross debt to EBITDA around 2x and free cash flow after dividends to adjusted gross debt near 30%. With a suspension of share buybacks until closing and Maxim agreeing to suspend its dividend payment during the approval process, Moody's projects combined cash balances will grow to over $3 billion by the expected closing in mid-2021.
Analog maintains excellent liquidity, with $785 million of cash and short term investments at April 2020. The company has been free cash flow positive every quarter over the last decade, and over the last 16 years, Analog has had only two quarters of negative free cash flow ($20 million each). Over the next year, we anticipate the company will use its free cash flow to repay a $450 million debt maturity in January 2021. Analog also maintains an unused $1.25 billion unsecured revolving credit facility that matures in June 2024 under which it has full access, same day availability, no requirement to re-represent as to no material adverse change, and significant cushion under its financial covenant.
The stable outlook reflects Moody's expectation that Analog will sustain strong profit margins although revenue will be pressured by COVID-19 driven weakness in 2020. The outlook also embeds our expectations that the company will continue to pay down debt with free cash flow while maintaining excellent liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Analog demonstrates market share gains while maintaining operating margins of 30% beyond a cyclical recovery. Adhering to conservative financial practices, including the maintenance of solid liquidity and a modestly leveraged capital structure (adjusted gross debt / EBITDA less than 2.0 times), could result in an upgrade. Post-closing, Analog would also need to demonstrate the successful integration of Maxim.
The ratings could be downgraded if Analog experiences a deterioration in business fundamentals resulting in sustained market share loss and operating margins that trend below 25%. Ratings pressure could develop if management adopts a more aggressive use of financial leverage such that adjusted gross debt / EBITDA exceeds 2.5 times on a sustained basis.
The principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Analog Devices, Inc. designs, develops, manufactures and markets a broad portfolio of standard linear analog semiconductors. Headquartered in Norwood, MA, the company reported revenues of $5.5 billion for the twelve months ended April 2020.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Richard J. Lane Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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