Fitch Affirms Intel at ‘A+/F1’ on Altera Acquisition; Outlook Stable
By Business Wire News
Fitch Ratings has affirmed the ratings for Intel Corporation (Intel), including the long-term Issuer Default Rating (IDR) of ‘A+’ and short-term IDR of ‘F1’, following Intel’s announcement it will acquire Altera Corporation (Altera) for $16.7 billion in cash.
Fitch’s actions affect $13.2 billion of debt, excluding incremental debt issuance to fund the vast majority of the Altera acquisition. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
The ratings and Outlook reflect Fitch’s belief that Intel’s operating profile will remain strong and credit protection measures solid for the rating, despite expectations for significant incremental debt issuance to fund the acquisition. Longer-term, Altera may strengthen Intel’s offerings in data center and internet of things (IoT)
Altera is a leading provider of field programmable logic devices (PLD) with 39% share in the $5 billion PLD market. By combining Intel’s processors and Altera’s PLDs on a lower-cost and better-performing single die, Intel hopes to accelerate growth in the data center and take share from application-specific solutions providers in rapidly growing IoT markets.
Altera adds nearly $2 billion of revenues with gross profit margins in the mid-60s, slightly higher than that of Intel with meaningfully lower capital intensity as a fabless semiconductor marker. In addition, Intel and Altera’s existing foundry relationship and design collaboration with Altera may reduce integration risk.
Intel plans to fund the acquisition with cash and incremental debt, although Fitch estimates new debt will comprise the vast majority of the purchase price, since all but $3.4 billion of Intel’s $14.1 billion of total cash at March 31, 2015 was located offshore. As a result, Fitch expects total leverage (total debt-to-operating EBITDA) of approximately 1x versus 0.5x for the latest 12 months (LTM) ended March 31, 2015.
With Fitch’s expectations for more than $5 billion of annual free cash flow (FCF), domestic FCF over the next two to three quarters prior to the acquisition’s close could reduce the amount of new debt to fund the purchase price. Fitch also expects the company will moderate share repurchases to maintain conservative total leverage.
KEY RATING DRIVERS
The ratings are supported by:
–Intel’s microprocessor dominance and significant technology leadership, particularly in manufacturing. Intel’s x86 processor architecture is also the premiere platform for data center/servers, providing the company a significant advantage in the enterprise and cloud-computing space.
–Broad geographic and business diversification. Although the majority of the company’s revenue is derived from PC and server demand, these markets are driven by different secular growth trends which Fitch expects to contribute to longer-term stability.
–Continued long-term secular growth in digitalization and computer adoption worldwide as well as greater penetration of microprocessors in areas outside of traditional computing.
Rating concerns include:
–Intel’s exposure to the cyclical demand for semiconductors which is typically exacerbated at the beginning of cyclical downturns due to channel inventory contraction.
–Significant and fixed investment intensity, including research and development (R&D) and capital spending. Intel’s leading profit margins largely compensate for this risk although capital spending has at times approached 50% of operating EBITDA.
–Intel has significant customer concentration with its largest customers typically accounting for 40% of total revenues.
–Flattish organic revenue growth in fiscal 2015, driven by weaker than expected personal computer (PC) demand that will be offset by continued strength in data center server chips.
–Beyond the near term, organic revenue growth in the low- to mid-single digits, driven by solid data center-related demand and, to a lesser extent, Intel’s strategy to combine both processers and PLDs on a single die.
–Consistent profitability through the forecast period, due to a more stable pricing environment and Intel’s manufacturing cost leadership.
–Annual capital spending of $9 billion to $10 billion and more than $11 billion of annual R&D investments through the intermediate-term to support the continuation of Moore’s Law.
–Management moderates share repurchases to the amount of cash used to fund the acquisition.
Negative rating actions could result from:
–Fitch’s expectation total leverage will remain above 1.25x, driven by more aggressive share repurchases and/or greater acquisition activity to build Intel’s mobility segment;
–Fitch’s expectation for normalized FCF-to-adjusted debt approaching 20%, as a result of continued tablet cannibalization of PC sales, and lack of penetration into the mobile market.
Positive rating action is unlikely, given the cyclicality and volatility inherent in the semiconductor business, as well as the need for flexibility in managing technological changes and challenges. A positive rating action would likely require:
–Profitability improvement across the Mobile and Communications Group in line with competitors, signifying improved competitiveness and increased market share within the space.
–An explicit commitment to a leverage ratio of 1x or below.
LIQUIDITY AND DEBT STRUCTURE
Liquidity as of March 28, 2015 was solid and consisted of:
— $14.1 billion of cash and cash equivalents and short-term investments, of which $3.4 billion was located in the U.S.;
–$3 billion commercial paper program (CP) with no outstanding balance.
Fitch’s expectation for more than $5 billion of annual FCF also supports liquidity. The company does not have a revolving credit facility to support its CP program but Fitch views Intel’s strong liquidity as providing ample support for the program.
Total debt as of March 28, 2015 was $13.3 billion and primarily consisted of:
— $1.5 billion in 1.95% senior unsecured notes due October 2016;
— $3 billion in 1.35% senior unsecured notes due December 2017;
— $2 billion in 3.3% senior unsecured notes due October 2021;
— $1.5 billion in 2.7% senior unsecured notes due December 2022;
— $750 million in 4.0% senior unsecured notes due December 2032;
— $1.6 billion principal value in 2.95% junior subordinated debentures due July 2035;
— $2 billion principal value in 3.25% junior subordinated debentures due July 2039;
— $1.5 billion in 4.8% senior unsecured notes due October 2041;
— $924 million in 4.25% senior unsecured notes due December 2042.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings for Intel:
–Issuer Default Rating (IDR) at ‘A+’;
–Short-term IDR at ‘F1’;
–$3 billion CP program at ‘F1’;
–Senior unsecured notes at ‘A+’;
–Junior subordinated notes at ‘A’.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research:
–‘Corporate Rating Methodology’ (May 28, 2014).
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage [749393 – 28-MAY-2014] (pub. 28 May 2014)
Fitch Ratings, Inc.
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Chicago, IL 60602
Alyssa Castelli, New York, Tel: +1 (212) 908 0540
Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526