Fitch Affirms Oracle's Ratings at A/F1 on Merger
Fitch Ratings has affirmed the ratings of Oracle, following the announcement that Oracle will purchase Sun Microsystems.
The ratings are affirmed as follows: --Issuer Default Rating (IDR) at 'A'; --Senior unsecured debt at 'A'; --Short-term IDR at 'F1'; --Commercial Paper (CP) at 'F1'.
The Rating Outlook is Stable.
The affirmation follows the announcement that Oracle will purchase Sun, for approximately $8.7 billion, including $1.3 billion of assumed debt ($5.6 billion net of cash and debt acquired). The Board of Directors of Sun has unanimously approved the transaction, which is anticipated to close by the summer of 2009, subject to Sun stockholder approval, certain regulatory approvals and customary closing conditions.
The affirmation incorporates Fitch's expectations that Oracle will fund the acquisition with a mixture of cash, CP borrowings and long-term debt issuance, with the majority being funded with debt, given that most of the company's cash is located outside the U.S. While credit protection measures are expected to deteriorate as a result of this transaction, Fitch believes Oracle retains solid financial flexibility at its current ratings, which incorporate total leverage of approximately 1.5 times (x) given the company's current operating profile. Fitch anticipates Oracle will continue to pursue an aggressive acquisition strategy, which could temporarily drive leverage outside of expectations. However, in line with past transactions, the company is expected to refrain from meaningful share repurchases and use significant free cash flow to reduce debt incurred in the transaction.
Fitch believes that materially weaker credit metrics over an extended period from a failed integration of Sun, a more aggressive financial policy, or a significantly worse impact of the weak macroeconomic environment, could result in negative ratings actions.
Concerns for the transaction center on greater integration risk associated with Oracle's purchase of Sun due to Sun's sizable employee base (33,000 at year-end 2008) and broad and diverse product portfolio, including a significant hardware segment. Additionally, uncertainty exists regarding potential segment/product divestitures, management structure and product strategy, particularly regarding open source software (e.g. MySQL). Positively, Fitch believes that Oracle can achieve significant cost synergies, primarily general and administrative expenses. Also, Oracle should be able to able to derive incremental benefits from Sun's sizable customer base and large intellectual property portfolio (e.g. Solaris and Java software platforms).
For the latest 12 months (LTM) ended Dec. 28, 2008, Sun generated total revenue, operating EBITDA and free cash flow of $13.3 billion, $1 billion (7.7 percent margin) and $8 million, respectively. Fitch estimates server systems, storage, software, and services accounted for approximately 39 percent, 17 percent , 5 percent and 39 percent of Sun's total revenue in the LTM period, respectively.
Pro forma for the recently initiated $1 billion dividend, Fitch estimates that Oracle's free cash flow for the LTM ended Feb. 28, was $7 billion, providing the company with significant financial flexibility for this transaction. Fitch said it believes that cash restructuring payments associated with the transaction and a pressured operating environment could have a slight impact on free cash flow in subsequent years, although the cash generating capability of the underlying business is expected to remain strong.
Oracle's credit metrics are expected to deteriorate upon the transactions close as Fitch estimates leverage could increase to approximately 1.4x from 1.0x from additional debt associated with the acquisition and interest coverage declining to approximately 12x from 18x, assuming 100 percent of the transaction is debt financed.
As of Feb. 28, Oracle's cash and cash equivalents were approximately $11.3 billion, of which approximately $10.1 billion was held by foreign subsidiaries. In addition, Oracle has an undrawn $5 billion CP program backed by a $3 billion revolving credit facility expiring March 2011, and a $2 billion 364-day facility expiring March 2010 (which the company entered into upon expiration of the previous $2 billion facility in March 2009).
Total debt as of Feb. 28, was approximately $11.2 billion and consisted primarily of $1 billion of floating- rate senior notes due May 2009, $1 billion of floating-rate senior notes due May 2010, $2.25 billion of 5 percent senior notes due January 2011, $1.25 billion of 4.95 percent senior notes due April 2013, $2 billion of 5.25 percent senior notes due January 2016, $2.5 billion of 5.75 percent senior notes due April 2018, and $1.25 billion of senior notes due April 2038.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, fitchratings.com.
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Source: www.tmcnet.com
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