OREANDA-NEWS. Avnet, Inc.'s (Avnet) 'BBB-' Issuer Default Rating (IDR) is not affected by the company's announced offer to acquire Premier Farnell plc (Premier Farnell), according to Fitch Ratings. Avnet currently has approximately $2.3 billion of debt outstanding as of April 2, 2016.

Pro forma for the transaction, Fitch expects leverage will be elevated relative to current gross leverage of 2.1x, as of April 2, 2016, but will remain within Fitch's tolerance for the 'BBB-' rating. The ratings incorporate Fitch's expectation that Avnet will continue its relatively conservative approach to balance sheet management and its approach to capital allocation. To that end, Fitch projects Avnet will reduce leverage to current levels during the ratings horizon. Fitch believes Premier Farnell's product portfolio compliments Avnet and will enhance customer's digital experience with Premier Farnell's web based offerings. Fitch expects the acquisition to be accretive to Avnet's EBITDA margins.

Avnet offered to acquire Premier Farnell for GBP 1.85 per share for a total equity value of GBP 691 million ($913 million). Avnet has established an unsecured bridge facility to fund the all-cash offer, but permanent funding details have not been disclosed. Fitch expects Avnet to fund the deal with debt as well as a portion of the company's $967 million of offshore cash on its balance sheet as of April 2, 2016. The proposed acquisition is in line with Fitch's belief that larger acquisitions would be largely debt-financed, resulting in higher than expected leverage. Such a scenario could pressure ratings if Fitch did not expect Avnet to return leverage to historical levels in the short-run. Fitch acknowledges that Avnet's offer to acquire Premier Farnell represents a 12.1% premium over a previous offer tendered by Datwyler Technical Components UK Limited and the closing of the transaction would be subject to the absence of additional offers from Datwyler Technical Components and usual and customary closing conditions including regulatory approval.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Expectations adjusted leverage will be sustained above 3.5x, most likely due to domestic cash limitations or debt-financed acquisitions and/or share repurchases;

--Significant revenue declines and margin compression due to the SMB end-market shifting its technology spending away from distributers toward large cloud providers that have the size to buy directly from ODMs.

Positive: Upside movement in the ratings is limited given Avnet's thin operating margin profile with significant cyclical demand exposure. Sustained improvement in credit metrics paired with a long-term strategic business rationale and demonstrated commitment from management to maintain a higher rating would be necessary.

LIQUIDITY

As of April 2, 2016, liquidity was solid with $1.037 billion in cash of which $967 million was held outside the United States and $833 million available from $1.25 billion senior unsecured revolving credit facility which expires in July 2019. Most of Avnet's cash balance is expected to remain outside the United States and additional debt may be required to maintain an adequate domestic cash balance while maintaining shareholder returns at current levels or to fund domestic acquisitions.

Fitch's expectations that Avnet will generate $400 million to $700 million of annual free cash flow (FCF) through fiscal year (FY) 2018 also support liquidity. In a downturn, cash from the liquidation of inventory should partially offset lower operating EBITDA to support FCF. Fitch believes Avnet would generate significantly less FCF if organic growth accelerates due to cash being spent on inventory expansion. Avnet has roughly $650 million available under a $900 million accounts receivable securitization (ARS) facility maturing in August 2016. Availability under the ARS facility is subject to the company having sufficient eligible receivables to support desired borrowings.

Total debt as of April 2, 2016 was $2.3 billion and consisted principally of the following:

--$422 million drawn on the company's $1.25 billion revolver expiring July 2019;

--$250 million drawn on the company's $900 million A/R securitization facility expiring August 2016;

--$300 million 6.625% senior notes due September 2016;

--$300 million 5.875% senior notes due June 2020;

--$350 million 4.875% senior notes due December 2022;

--$550 million 4.625% senior notes due April 2026;

--$158 million of bank credit facilities and other debt.

Fitch currently rates Avnet as follows:

Avnet, Inc.

--IDR 'BBB-';

--$1.25 billion senior unsecured revolving credit facility 'BBB-';

--Senior unsecured debt 'BBB-'.

The Rating Outlook is Stable.