Fitch: TE Connectivity’s ‘BBB+’ IDR Unaffected by Acquisition of Deutsch Group

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings stated today that the ratings for TE Connectivity Ltd. (NYSE: TEL, TE Connectivity) and its wholly owned subsidiary, Tyco Electronics Group S.A. (TEGSA) are unaffected by the company's proposed acquisition of Deutsch Group SAS (Deutsch) for EUR1.55 billion (approximately $2.1 billion at current exchange rates), approximately 11 times (x) Deutsch's projected 2011 operating EBITDA of approximately $175 million. The transaction amount includes TE Connectivity's repayment of Deutsch's currently outstanding debt.

Deutsch has significant circular connector capabilities, which are the dominant technology used in harsh connectivity applications. The acquisition strengthens TE Connectivity's share positions within aerospace and defense, industrial transportation and industrial equipment markets. Deutsch also complements TE Connectivity's geographic sales mix and provides some opportunity for cost efficiencies.

TE Connectivity is expected to fund the acquisition with a combination of available cash and incremental borrowings. For fiscal year ended Sept. 30, 2011, Fitch estimates TE Connectivity's total leverage was approximately 1 times (x) with interest coverage (operating EBITDA to gross interest expense) of approximately 16x. Assuming an incremental $1 billion of debt, Fitch estimates pro forma total leverage of below 1.5x with interest coverage in excess of 15x.

TE Connectivity stated that it intends to repay the approximately $700 million of senior notes due Oct. 1, 2012 with available cash. Fitch continues to anticipates TE Connectivity will manage debt levels and moderate share repurchases to maintain total leverage (total debt to operating EBITDA) below 2x beyond any short-term uptick.

The transaction is expected to close in the third fiscal quarter of 2012 and is subject to customary regulatory approval and acceptance of TE Connectivity's binding offer by the seller.

The ratings and Outlook reflect TE Connectivity's:

--Diversified geographic, end-market and customer portfolios, which in conjunction with restructuring-driven lower fixed costs, should result in more consistent operating results;

--Consistent annual free cash flow of more than $750 million through the intermediate term;

--Conservative financial policies, including solid liquidity and commitment to managing debt levels to maintain total leverage target at or below 2x;

--Industry-leading positions in large and relatively fragmented markets;

--The company's substantial scale and scope, which should result in longer-term share gains in faster-growing developing markets.

Fitch's rating concerns center on:

--The cyclical demand patterns associated with electronics components;

--The company's ability to mitigate ongoing average selling price (ASP) pressures in the majority of its end-markets with efficiency initiatives and new product introductions;

--The company's use of cash for share repurchases and acquisitions, given mature organic revenue growth prospects across certain key end-markets.

Further positive rating actions could result if the company is able to maintain operating margins at the higher end of the 10%-15% range, likely signaling the company's ability to offset average selling price erosion and elevated commodities prices with productivity gains, or commit to lower debt levels and stronger credit protection measures through the business cycle.

Negative ratings actions could result from operating profit margins below the 10%-15% range, likely due to an inability to offset elevated commodities prices with productivity gains, driving total leverage above 2x for an extended period, or meaningfully lower than anticipated annual free cash flow.

Fitch believes TE Connectivity's liquidity was solid at Sept. 30, 2011 and supported by:

--Approximately $1.2 billion of cash and cash equivalents;

--An undrawn $1.5 billion, five-year revolving credit facility expiring June 2016. This credit facility backs up the company's up to $1.25 billion commercial paper (CP) program;

--A recently added $700 million committed credit facility for liquidity insurance.

Further supporting liquidity is Fitch's expectation for annual free cash flow of more than $750 million over the intermediate term.

Fitch anticipates TE Connectivity will maintain a conservative financial profile, curtailing stock buybacks during periods when free cash flow is pressured, as the company did during the recent downturn. Although legacy litigation issues essentially have been settled, the company anticipates paying its share of legacy tax liabilities over several years. Contributions to the company's pension plans over the next several years are accommodated at existing ratings.

As of Sept. 30, 2011, total debt was approximately $2.7 billion and consisted of:

--Approximately $720 million of 6% senior notes due Oct. 1, 2012;

--Approximately $300 million of 5.95% senior notes due Jan. 15, 2014;

--Approximately $750 million of 6.55% senior notes due Oct. 1, 2017;

--Approximately $250 million of 4.875% senior notes due Jan. 15, 2021;

--Approximately $475 million of 7.125% senior notes due Oct. 1, 2037;

--Approximately $90 million of 3.5% convertible subordinated notes due 2015;

--Other debt of approximately $83 million.

Fitch currently rates TE Connectivity and TEGSA as follows:

TE Connectivity: </p>

--Issuer Default Rating (IDR) 'BBB+';

--Short-term IDR 'F2'.

TEGSA:

--IDR 'BBB+';

--Short-term IDR 'F2';

--CP program 'F2';

--Senior unsecured revolving credit facility (RCF) 'BBB+';

--Senior unsecured notes 'BBB+'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 16, 2010);

--'U.S. Industrial Stats Quarterly - Second Quarter 2010, Sept. 28, 2010;

--'Global Economic Outlook, Oct. 1, 2010.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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Fitch Ratings
Primary AnalystJason Pompeii, +1-312-368-3210
Senior Director
70 West Madison Street
Chicago, IL 60602
or
Secondary AnalystJason Paraschac, CFA, +1-212-908-0746
Senior Director
or
Committee ChairpersonJamie Rizzo, CFA, +1-212-908-0548
Senior Director
or
Media Relations:Brian Bertsch, +1-212-908-0549
Email: [email protected]

Source: Fitch Ratings