St. Jude Medical (STJ) Places Under Review for Downgrade by Moody's
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Moody's Investors Service placed St. Jude Medical's (NYSE: STJ) (St. Jude's) Baa1 senior unsecured ratings under review for downgrade following the company's announcement that it plans to acquire Thoratec Corporation for approximately $3.4 billion, net of cash acquired. At the same time, Moody's affirmed St. Jude's Prime-2 short-term rating. St. Jude plans to finance the transaction with $3.4 billion of new debt. Management expects the transaction to close in the fourth quarter of 2015.
Ratings placed on review for downgrade:
St. Jude Medical, Inc.
Baa1 Senior unsecured rating
(P)Baa1 Senior unsecured shelf rating
Rating affirmed: St. Jude Medical, Inc. Prime-2 short-term rating RATING RATIONALE
"While Thoratec will broaden St. Jude Medical's presence in heart failure therapies, the acquisition is richly-priced and will significantly raise its leverage initially," said Diana Lee, a Moody's Vice President and Senior Credit Officer.
Thoratec's ventricular assist devices are used to treat patients with advanced heart failure. This will add to St. Jude's heart failure product line, which includes its innovative CardioMEMS sensor technology, used to prevent hospitalizations by monitoring heart failure patients at home. With about $500 million in sales, Thoratec will somewhat reduce St. Jude's reliance on its slow growth cardiac rhythm management segment.
Moody's anticipates that it will downgrade St. Jude's senior unsecured rating by one notch to Baa2 with a negative outlook if the transaction closes as currently proposed. This potential rating outcome reflects a number of assumptions including: (1) St. Jude will finance the transaction with $3.4 billion of new debt; (2) management is committed to a strong investment grade rating and will focus on relatively rapid deleveraging; (3) the company will achieve solid sales growth and improved cash flow; and (4) St. Jude will use substantially all of its US and OUS excess free cash flow toward debt repayment.
Pro-forma for the transaction (excluding any synergies), debt/EBITDA for the combined company will be about 4.1 times, significantly higher than its current leverage of about 2.2 times. Moody's believes, however, that over the next 24 months, the company has the potential to reduce debt/EBITDA to around 2.5 times, which would be consistent with a Baa2 rating. An assignment of a negative outlook would reflect Moody's concerns that St. Jude would not be able to meaningfully improve cash flow or reduce debt sufficiently to achieve leverage consistent with a Baa2 rating.
Moody's review will focus on St. Jude's final financing plans. As part of this merger agreement, Thoratec will enter a "go shop" period of 30 days and will actively solicit alternative bids. Any changes to the final price or financing plan could result in a change in Moody's expected rating or outlook for St. Jude.
The principal methodology used in these ratings was Global Medical Product and Device Industry published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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