OREANDA-NEWS. Fitch Ratings has downgraded Newell Rubbermaid Inc.'s (Newell) long-term ratings to 'BBB-' from 'BBB+' and short-term ratings to 'F3' from 'F2' due to the pending acquisition of Jarden Corporation (Jarden) valued at $19.5 billion (as of March 1, 2016). Fitch previously placed the ratings on Negative Watch in December 2015 when Newell initially announced the transaction. The Rating Outlook is now Stable.

The acquisition will be funded with Newell shares (226 million shares) and $9.5 billion in new debt. This reflects an acquisition multiple of 16.2x on Jarden's 2015 reported EBITDA of $1.2 billion or close to 13x pro forma the inclusion of Jarden's acquisitions of Jostens (closed November 2015) and Waddington (closed July 2015). The transaction is expected to close during second quarter 2016.

Newell will repay $4.6 billion of Jarden's existing debt. It will assume approximately $630 million of Jarden debt ($300 million principal amount of 5% senior notes due 2023 and EUR300 million principal amount of 3 3/4% senior notes due 2021 that will be exchanged into Newell unsecured debt). Newell put in place a $1.5 billion term loan due 2019 and expects to issue $8 billion in unsecured notes. Newell also upsized its credit facility to $1.25 billion due 2021 from $800 million to provide additional flexibility.

The rating revision to 'BBB-' reflects Fitch's expectations that the leverage for the combined entity will be around 3.5x in 2018 from a current pro forma leverage of around 5.5x (pro forma for announced acquisitions and divestitures at Jarden and Newell). Newell standalone leverage was 2.9x at the end of 2015 and Fitch had previously expected Newell's leverage to decline to under 2.5x at the end of 2016, reflecting a full year of Elmer's results (acquired in October 2015).

KEY RATING DRIVERS

Improved Scale on Strong Organic Growth

With $15.5 billion in pro forma revenue, the combined companies will have scale with both vendors and customers, particularly in international markets, bringing benefits in procurement, back office and some overhead. Jarden is a cross-selling enterprise and could bring additional benefits in gaining new distribution and vice versa. For example, Jarden has greater and better Direct to Consumer ecommerce capabilities and has built a platform that Newell can leverage.

Both Jarden and Newell have strong organic growth prospects as standalone companies. Newell has grown top line organically by 3% annually over the past three years although overall top line has been flat at about $5.9 billion over the past five years due to currency headwinds. EBITDA has improved to $1,050 million in 2015 from $930 million in 2011 due to Project Renewal expense management initiatives. Fitch expects Newell's organic top line growth to remain in the 3% range over the next 24 - 36 months and standalone EBITDA to grow to $1.2 billion in 2018.

Jarden's pro forma top line has grown to $9.7 billion in 2015 from $6.7 billion in 2011, with organic top line growth of around 5% annually over the past three years and a number of sizable acquisitions. 2015 EBITDA was $1.2 billion, up from $910 million in 2011 and Fitch expects standalone 2016 EBITDA to be $1.5 billion, reflecting full year contribution from its recent acquisitions. Fitch expects Jarden can also sustain organic topline growth in the 3% range annually.

High Leverage but Expect Mid-3x Leverage by 2018

Fitch expects pro forma leverage near 5.5x at transaction close but expects leverage to trend towards the mid-3x by end of 2018, assuming underlying trends remain strong, targeted synergies are substantially realized (with $500 million targeted by end of 2019), and Newell pays down debt with FCF.

Fitch expects Newell to start paying down debt beginning 2016 and FCF is expected to be close to $800 million in 2017 and approach $1 billion in 2018. Newell has $900 million in debt maturities through 2018 (excluding its A/R facility) as well as the recently issued $1.5 billion term loan due in 2019, and Fitch expects this debt to be paid off to get leverage below 3.5x. There are opportunities within the broad portfolio for brands to be pruned and reduce debt if necessary, but this is not currently contemplated in Fitch's projections.

Newell has historically operated with leverage at or below 2.5x; however, with the announcement of this acquisition, the company has changed its financial policy to target leverage in the 3.0x-3.5x range.

Vastly Different Operating Models Pose Integration Risk

Jarden is a highly decentralized and entrepreneurial sales enterprise which grew via acquisitions from approximately $300 million in 2001 to a pro forma $9.7 billion with several large acquisitions in 2015. Jarden is a holding company with a relatively hands-off management style over the companies purchased over the years.

Newell on the other hand has transitioned to a centralized business model over the past five years, raising the possibility of a conflict in business approaches that could hinder integration. As a result, integration activities to achieve synergies have to be more thoughtful than most combinations to avoid meaningful disruption or loss of business and talent.

KEY ASSUMPTIONS
Fitch's key assumptions for Newell on a combined basis with Jarden include:

--Organic revenue growth rate of 3% annually (offset by foreign exchange of 2% in 2016 and neutral FX thereafter) on a pro forma base of $15.5 billion;
--EBITDA growing to $3.2 billion in 2018 from a 2015 pro forma EBITDA base of $2.4 billion (annualizing recent acquisitions and divestitures);
--FCF generation of $800 million in 2017 and approaching $1 billion by 2019;
--Pro forma combined leverage of 5.5x trending to below 3.5x by 2018 on EBITDA growth and $2.4 billion of debt reduction.

RATING SENSITIVITIES
A negative rating action could result from marked and sustained deceleration in organic revenue growth over the next two years relative to our 3% expectation, or material decline in EBITDA margin from the anticipated 19% range due to loss of business or talent or the failure to achieve targeted synergies. These issues and/or the lack of significant debt reduction such that leverage of 3.5x or less is not achieved by the end of 2018 would result in a negative rating action.

Fitch does not anticipate a positive rating action in the near term. However, a positive rating action could result from the ability and public commitment to sustain leverage under 3.0x, while maintaining strong business momentum.

FULL LIST OF RATING ACTIONS

Fitch has downgraded Newell Rubbermaid, Inc.'s ratings as follows:

--Long-term Issuer Default Rating (IDR) to 'BBB-' from 'BBB+';
--$1.25 billion senior unsecured credit facility to 'BBB- from 'BBB+';
--Existing senior unsecured notes, 'BBB-';
--Short-term IDR to 'F3' from 'F2';
--Commercial paper to 'F3' from 'F2'.

Fitch has assigned the following ratings:

--$1.5 billion senior unsecured term loan 'BBB-';
--New $8.6 billion senior unsecured notes 'BBB-'.

The Rating Outlook is Stable.