OREANDA-NEWS. March 23, 2016. Fitch Ratings does not expect any rating implications from ACCO Brands Corporation's (ACCO) announced 100% buyout of its Australian joint venture (JV). Despite a modest uptick in leverage to fund the buyout, Fitch expects debt/EBITDA to decline from 3.2x at the end of 2015 to the high-2.0x level over the next 24 - 36 months absent any further debt-financed acquisitions. From a strategic standpoint, Fitch views the buyout as a modest positive, as it will give ACCO control over its Australian business and allow for cost synergies (\\$8 million planned) with existing operations.

A full list of ACCO's ratings follows at the end of this release.

ACCO announced the acquisition of the remaining 50% of Pelikan Artline Pty Limited, its joint venture company serving the Australia and New Zealand markets, as well as a buyout of a minority interest in a subsidiary of the joint venture. The business currently operates independently from ACCO's existing Australian business, yielding cost structure duplications and inefficiencies.

The cash purchase price will be approximately \\$103 million. Estimated full year incremental sales and adjusted income contribution to ACCO would be \\$112 million and \\$17 million (pre synergies), respectively, based on 2015 results. ACCO currently generates approximately \\$8 million in annual income from the JV, which Fitch excludes from EBITDA but would include in EBITDA once the entity is fully owned. As a result, the total annual impact to ACCO EBITDA is approximately \\$25 million.
Fitch's ratings on ACCO are predicated on the company's stable free cash flow and ongoing debt paydown, though constrained by concerns regarding secular challenges and channel shifts within the company's merchandise mix as well as the risk of further debt-financed acquisitions. The time management (calendars) and storage categories represent approximately 30% of ACCO's sales, and both categories have seen declines given ongoing shifts online. In addition, the office supply superstores, which represent 24% of ACCO's sales, have been losing share to other players including general merchants and online-only competitors.

While ACCO has been able to mitigate this share migration through channel management (with growth in its direct to consumer channel and increased sales to Amazon), continued store closures - especially if the Staples/Office Depot merger is approved - may challenge ACCO's growth trajectory. To address these concerns, ACCO could adjust its portfolio towards higher growth categories through debt-financed acquisitions, which may cause upward pressure on leverage metrics from current levels.

However, the company continues to generate stable cash flow, which it has partly deployed toward debt paydown. In 2015, for example, reported sales fell 11% to \\$1.5 billion (down 3% ex currency) on macro weakness in Brazil and planned declines in sales to Office Depot. EBITDA fell 8% to \\$230 million, as margin improved from 14.9% to 15.3% on expense management. Despite the EBITDA decline, free cash flow was flat at \\$144 million due to effective balance sheet management and reduced cash interest and tax expense. As a result, the company was able to pay down \\$71 million of debt, ending the year with leverage of 3.2x, flat to 2014 despite the EBITDA decline.

ASSUMPTIONS

--Revenue is expected to increase 2% to \\$1.54 billion in 2016 due to the incremental \\$80 million in sales from the Australian JV purchase. Revenue for the existing ACCO business is expected to decline 4% due to the strong U.S. dollar, with flat sales growth on a constant currency basis. Organic growth is expected to be around 1% beginning 2017.
--EBITDA is expected to be in the \\$240 million range in 2016, as positive EBITDA from the Australian JV will be somewhat mitigated by the impact of the strong U.S. dollar on ACCO's operating results. Modest revenue growth and synergies from the acquisition should drive EBITDA toward \\$250 million beginning 2017.
--Free cash flow (FCF) is expected to be flat around \\$140 million in 2016, and around \\$150 million annually thereafter. In 2016, Fitch anticipates ACCO will use free cash to pay down debt and continue to repurchase its equity. Absent an acquisition, which ACCO could finance with a combination of free cash flow and debt, Fitch assumes free cash flow beginning 2017 is used to repurchase shares and reduce debt approximately \\$30 million per year based on the term loan amortization schedule, driving leverage from 3.2x in 2016 to the high 2.0x range.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:--An upgrade beyond the 'BB' range is possible if the company makes acquisitions that change its business mix or model to one with less cyclical or higher growth prospects while maintaining current credit metrics and FCF characteristics. However, an upgrade is not anticipated in the near term given existing business model issues.

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

--Inability of the company to cut costs to offset the impact of declining sales and maintain current credit protection measures and cash flows.
--Sustained gross leverage at or above 4x at year end, with FCF materially below expectations.
--A large debt-financed acquisition without a concrete plan to reduce debt meaningfully below 4x in the 18 - 24 month time frame post a transaction could lead to a negative rating action.

Fitch currently rates ACCO as follows:

--Long-term Issuer Default Rating (IDR) 'BB';
--\\$300 million senior secured revolving credit facility due April 2020 'BB+/RR1';
--\\$300 million senior secured Term Loan A due April 2020 'BB+/RR1';
--\\$500 million senior unsecured 6.75% notes due April 2020 'BB/RR4'.

The bank revolving credit facility, Term Loan A, and the senior unsecured notes are guaranteed by domestic (mostly Delaware and Nevada) subsidiaries.

The Rating Outlook is Stable.