Approximately EUR8.3 billion of debt affected
Frankfurt am Main, July 02, 2012 -- Moody's Investors Service has today affirmed Linde AG's A3 and Prime-2 (P-2) senior debt ratings with a stable outlook following its definitive agreement for the acquisition of Lincare Holdings Inc. (Lincare, not rated).
"The affirmation of Linde's A3 ratings reflects our view that, although the company's acquisition of Lincare would be in itself negative for the issuer's key credit metrics, we would expect these to recover over a 12-24 month horizon and overall remain commensurate with an A3 rating," says Wolfgang Draack, a Moody's Senior Vice President and lead analyst for Linde.
On Monday, 2 July 2012, Linde announced its agreement to acquire Lincare, one of US's largest providers of respiratory services, with revenues of USD1.85 billion in 2011. The offer of USD41.5 per share values Lincare at approximately USD4.6 billion, equivalent to 2.5x 2011 sales and approximately 10.1x EBITDA. Linde plans to fund the acquisition with around two thirds debt and one third common equity. The bid, supported by Lincare's board, is subject to acceptance by the shareholders and customary regulatory approvals and is expected to close already in third quarter 2012.
Moody's considers that the acquisition would be complementary to Linde's existing business portfolio. In the rating agency's view, the acquisition would materially enhance Linde's position in home healthcare, a segment of strategic focus for the company, as well as in North America at a margin comparable to that achieved by Linde in its industrial gas business.
Moody's views the synergy potential of the combination as marginal and the price currently offered in line with valuations for the two European home healthcare acquisitions by Linde in January (Air Products' Continental-European homecare product business) and Air Liquide in June 2012 (LVL Médical Groupe SA, a provider of home healthcare, primarily home-based medical assistance for respiratory diseases in France and Germany). From a rating perspective, the competitive acquisition price, the substantial share of equity financing and Lincare's capacity for cash flow generation offset (1) the sizeable additional debt that would be taken on by Linde as a result of the acquisition; and (2) the challenges expected for Lincare in responding appropriately to the introduction of competitive bidding, Phase II, in the US healthcare system, which from July 2013 is likely to materially cut Medicare reimbursement rates for oxygen equipment and services.
Prior to the offer, Linde's rating was strongly positioned in the A3 rating category. In itself, the transaction will negatively affect key credit metrics debt/EBITDA and retained cash flow (RCF)/net debt in the first full financial year following the closing of the transaction. However, Moody's would expect these metrics to recover quickly in the following year and remain overall within the range the rating agency expects for the current rating, i.e. RCF/net debt in the mid-twenties in percentage terms and leverage, measured in terms of debt/EBITDA, not rising above the 2.5x-3.0x range. Should the bid for Lincare be accepted and the transaction close as currently anticipated, Linde's headroom under the A3 rating will be substantially more limited.
WHAT COULD CHANGE THE RATING UP/DOWN
Upside rating pressure depends on Linde's operating performance and ability to improve profitability and cash flow generation. Upward rating pressure could develop if Linde achieves RCF/net debt of 27%-28% through the cycle and leverage materially below 2.5x debt/EBITDA.
The rating is based on Moody's expectation that Linde will be able to demonstrate stable operating performance and cash flow generation while maintaining a conservative financial policy. An RCF/net debt ratio that is sustained below the mid-twenties in percentage terms and debt/EBITDA rising above the 2.5x-3.0x range would exert downward pressure on the rating. The rating can accommodate a temporary shortfall from these levels, whether this were a result of incomplete consolidation in the first year of cash flows from Lincare, or the period of time needed by Lincare to counter the Medicare reimbursement cuts, although Moody's expects this to be relatively short.
The principal methodology used in these ratings was Global Chemical Industry published in December 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Linde Aktiengesellschaft, headquartered in Munich, Germany, is an international gases and engineering group with operations in more than 100 countries and approximately 50,000 employees. Linde achieved revenues of EUR13.8 billion in 2011.
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Wolfgang Draack Senior Vice President Corporate Finance Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Eric de Bodard MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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