OREANDA-NEWS. The acquisition of Affymetrix Inc. (Affymetrix; NASDAQ: AFFX) by Thermo Fisher Scientific Inc. (Thermo Fisher; NYSE: TMO) for approximately $1.3 billion is in line with expectations, according to Fitch Ratings. Fitch has reviewed the transaction but is taking no rating actions.

The all-cash transaction is expected to be entirely debt-financed, which reduces near term financial flexibility. Fitch estimates that $1.3 billion of incremental debt could increase the company's pro forma gross debt/EBITDA ratio by roughly a quarter turn to around 3.25x. Fitch notes that Thermo Fisher's ample free cash flow (FCF), which could exceed $3 billion in 2016, should be sufficient to fairly quickly repay the debt issued to finance the transaction, as well as to fund modelled share repurchases of at least $1 billion in 2016. This assumes no near term additional M&A activity of material size.

Fitch views the magnitude of incremental debt as manageable but also meaningful when viewed in relation to the roughly $12.5 billion of total debt expected outstanding at Dec. 31, 2015 and in relation to Affymetrix's fairly modest expected initial EBITDA contribution of between $60 million-$70 million.

Fitch notes that this targeted approach is consistent with recent acquisition activity in the broader healthcare sector (excluding biopharmaceutical companies) which has been characterized by modest sized, capabilities-based deals, rather than transformational transactions. Fitch attributes this trend to the fact that fewer transformational targets remain in the wake of recent transactions and the availability of fairly cheap debt available to finance transactions with a longer payback period.

The acquisition appears to be strategically sound as it bolsters the breadth of Thermo Fisher's offerings in its Life Sciences segment, particularly its cellular and genetic analysis capabilities. Affymetrix's product portfolio, which is focused on molecular diagnostics and genomics analysis, has very little overlap with Thermo Fisher's existing products. Affymetrix will likewise benefit from Thermo Fisher's expansive scale and broad geographic reach.

Fitch continues to expect that Thermo Fisher will be an active acquirer going forward, while maintaining run-rate gross debt/EBITDA of between 2.8x-3.2x, which Fitch views as supportive of Thermo Fisher's 'BBB' ratings. Most targets in 2016-2017 are expected to be fairly similar in size or smaller than Affymetrix - bolt-on acquisitions that augment the company's product portfolio. Larger transactions during this timeframe may require a component of equity financing in order to maintain the company's credit metrics at levels that are commensurate with the current rating category.

Fitch notes that several facets of the firm's credit profile could support higher ratings than the current 'BBB'. These factors include the company's significant scale, good end-market diversification and product mix, as well as its constructive growth outlook, solid margins, and robust cash flow profile

Fitch currently rates Thermo Fisher and its subsidiaries as follows:

Thermo Fisher Scientific Inc.
--Long-term Issuer Default Rating (IDR) and senior notes 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.

Life Technologies Corp.
--Long-term IDR and senior notes 'BBB'.

The Rating Outlook is Stable.