Rating Action: Moody's affirms Baa1 senior unsecured of Maxim following acquisition agreement with Analog Devices; outlook stable
Global Credit Research - 13 Jul 2020
New York, July 13, 2020 -- Moody's Investors Service ("Moody's") affirmed Maxim Integrated Products, Inc. ("Maxim") Baa1 senior unsecured rating following today's announcement that it has reached an agreement to be acquired by Analog Devices, Inc. ("Analog") 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. The outlook remains stable.
Upon closing, current Analog shareholders will own approximately 69 percent of the combined company, while Maxim stockholders will own approximately 31 percent. The combined company had $7.7 billion of revenue and $3.3 billion in adjusted EBITDA on a pro forma basis.
..Issuer: Maxim Integrated Products, Inc.
....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1
..Issuer: Maxim Integrated Products, 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 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 are highly complementary and aligned with key secular growth trends. 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.
In addition to modest cost synergies 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 cash balances will grow to over $3 billion.
Maxim's maintains an excellent liquidity profile. As of March 2020, Maxim had cash and short-term investments of $1.7 billion. Given the moderating capital intensity of the high performance analog sector, a track record of consistent free cash flow generation (twenty-five consecutive years of positive free cash flow), along with expectations that management will maintain at least $500 million of cash and short-term investments, Moody's views the company's liquidity profile as excellent. Illustrative of Maxim's strong liquidity, the company's cash exceeds total debt and cash also exceeds the annual sum of R&D and capital expenditures. The next debt maturity is a $500 million noted due in 2023.
The stable outlook reflects Moody's expectations that Maxim will maintain its competitive positions throughout its high performance analog portfolio and continue to generate solid operating profits and free cash flow through cycles. It also incorporates expectations that management will maintain a modestly leverage capital structure and excellent liquidity profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Maxim's rating could be upgraded if the company gains market share throughout its product portfolio, sustains operating margins above 25%, and maintains a modestly leveraged balance sheet with cash and short term investments in excess of $1.0 billion.
Ratings could be downgraded if business fundamentals deteriorate, resulting in sustained market share loss and operating margins sustained below 20%. Also, a more aggressive use of financial leverage such that adjusted debt-to-EBITDA is sustained above 2.0x or cash balances fall below $500 million could pressure the rating.
The principal methodology used in these ratings was Semiconductor Industry published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130733. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Maxim Integrated Products, Inc. designs and manufactures a broad portfolio of high performance analog semiconductors. Headquartered in San Jose, CA, Maxim sells to an expansive end market, with the broad industrial market its highest exposure, as well as a wide range of automotive, consumer and communications markets. Maxim generated $2.2 billion of revenue for the twelve months ended March 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.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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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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