MOODY'S CONFIRMS TYCO'S RATINGS (SR AT Baa1); PLACES MALLINCKRODT'S RATINGS UNDER REVIEW FOR POSSIBLE UPGRADE (SR AT Baa2)
Moody's Investors Service confirmed the debt ratings of Tyco International Ltd. (Tyco) and placed Mallinckrodt Inc.'s (Mallinckrodt) long-term debt rating under review for possible upgrade, following Tyco's announcement that it would acquire Mallinckrodt in an equity-financed transaction valued at $3.2 billion and also assume approximately $1 billion of Mallinckrodt's debt. A closing in the fourth quarter of 2000 is expected after customary regulatory review and Mallinckrodt's shareholders approval, and the transaction will be accounted for using the purchase method. The rating confirmation incorporates the benefits of the inclusion of Mallinckrodt's respiratory care, diagnostic imagining and analgesic pharmaceuticals operations into Tyco's Healthcare and Specialty Products business segment, and likelihood of meaningful cost saving opportunities. The confirmation also reflects the ongoing challenge for Tyco to successfully integrate units acquired through its growing pace of acquisitions, and to reduce costs and expand margins in all of its business lines in order to meet growth objectives. These issues will be particularly important for the Mallinckrodt acquisition, as the purchase price represents a 13X multiple of historic EBIT, and industry conditions have been pressing Mallinckrodt's earnings. Nevertheless, the rating confirmation and continuing negative rating outlook take into account Tyco's prospects for continued strong free cash flow generation, its use of equity as currency in this acquisition and the financial flexibility afforded by planned asset sales, offset by recent debt-financed acquisitions, and rising debt levels and share repurchases.
The review of the long-term debt rating of Mallinckrodt will focus on its cash flow generation ability as part of Tyco's operations, where Mallinckrodt will legally reside within Tyco's organization, and whether or not Tyco will legally assume or guarantee Mallinckrodt's debt. The Prime-2 short-term debt rating of Mallinckrodt is not under review and is confirmed.
Tyco International Ltd.-- (P)Baa1 for senior debt securities and (P)Baa2 for subordinated debt securities, and (P)"baa2" for preferred stock issued under its 415 shelf registration.
Tyco International Group S.A.-- Baa1 for senior notes and debentures; (P)Baa1 for senior debt securities issued under its 415 shelf registration guaranteed by Tyco, Baa1 for bank revolving credit facilities, guaranteed by Tyco; and Prime-2 short term debt rating guaranteed by Tyco.
Tyco International (US) Inc.-- A3 for senior unsecured notes and debentures.
ADT Operations, Inc.-- A3 for senior unsecured notes; Baa1 for senior subordinated notes; and Baa1 for subordinated Liquid Yield Option Notes.
Raychem Corporation -- Baa2 rating for the $400 million senior, unsecured notes.
Mallinckrodt Inc. -- Prime-2 short-term debt rating.
Ratings under review:
Mallinckrodt Inc. -- Baa2 for senior unsecured notes and debentures, industrial revenue bonds;. (P)Baa2 for senior unsecured securities issued pursuant to 415 shelf registration; and Baa2 for bank revolving credit facilities.
The rating agency said that the announced acquisition valued at $47.50/share, 1.6x sales and 13X EBIT, and creating $2 billion of goodwill, appears fully priced. However, Tyco's proven track record of taking out costs and improving operating margins should enhance Mallinckrodt's financial performance, which has recently been under pressure because of ongoing cost control issues affecting the healthcare industry. Consistent with its acquisition philosophy, Tyco feels that the acquisition will be accretive to earnings in the first year. The use of equity in financing this transaction is viewed positively, Moody's said. In addition, recent restatement of Tyco's 10K for 1999 and 10Q for the first quarter of 2000, increasing fully-diluted earnings per share by two cents for 1999 and reducing by two cents fully-diluted earnings per share for the first quarter 2000 represents a modest reclassification. Importantly, this revision did not impact sales, cash flow or earnings before non-recurring charges and the company is hopeful that this restatement will satisfy the informal inquiry by the enforcement arm of the SEC. At the same time, Moody's recognizes that the strong near-term business fundamentals should enable Tyco to produce free cash flow of over $3 billion, augmented by the sale of ADT Automotive for $1 billion. Prudent deployment of this strong cash flow among acquisition activities, debt reduction, and share repurchase would be viewed favorably. For the first six months of 2000, Tyco's free cash flow of almost $1 billion has been used for $1 billion of share repurchase and $2.3 billion of debt-financed acquisitions, resulting in increased debt levels. In addition, Tyco has pending the $750 million cash acquisition of the electronic OEM business of Thomas & Betts and has $1.8 billion remaining under its current $2 billion share repurchase program.
Mallinckrodt Inc. is based in St. Louis and is a major producer of diagnostic imaging agents, medical devices, analgesic pharmaceuticals, catalysts and laboratory and microelectronic chemicals.
Tyco International Ltd., headquartered in Hamilton, Bermuda, is a diversified global manufacturing and service company of industrial and commercial products serving the fire protection, electronic security service, disposable medical products, packaging materials, flow control, electrical and electronic components, and underwater telecommunication markets.
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