Reuters: Mergers News: TEXT-S&P may raise Pentair 'BBB-' ratings

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TEXT-S&P may raise Pentair 'BBB-' ratings Mar 28th 2012, 17:14 Wed Mar 28, 2012 1:14pm EDT Overview -- Pentair Inc., a U.S.-based manufacturer of water treatment and storage products, has announced its plan to merge with Tyco International Ltd.'s flow control business in an all-stock transaction totaling approximately $10 billion. -- We are placing our ratings on Pentair, including the 'BBB-' corporate credit rating, on CreditWatch with positive implications. -- We expect to resolve the CreditWatch after evaluating the business and financial impact of the transaction, financing details, and management's financial policies. Rating Action On March 28, 2012, Standard & Poor's Ratings Services placed its ratings on Golden Valley, Minn.-based Pentair Inc., including the 'BBB-' corporate credit rating, on CreditWatch with positive implications. Rationale The CreditWatch placement reflects our view that the combined entity would likely have a stronger business risk profile than Pentair's on a stand-alone basis. We believe that Tyco International's flow control business (Tyco Flow) will add diversity, scale, and scope to Pentair's operations. The combined entity would generate about $7.7 billion of pro forma 2012 revenues in three segments: water and fluid solutions (about 45% of revenues), flow control (30%), and equipment protection solutions (25%). Greater end-market diversity would result from the meaningful addition of revenues from energy markets and the reduction of Pentair's exposure to the U.S. residential market to about 20% from about 35% of revenues. Geographic diversity would also improve; the resulting company would generate more than half of its revenues outside the U.S. In addition to cost synergies, Pentair would gain access to new markets and customers that Tyco Flow currently serves, offering possible additional revenue. Offsetting these positive attributes is our expectation of Pentair's continued presence in fragmented and cyclical end markets. Also, the addition of Tyco Flow's water business introduces less predictable, project-based revenues. The improved business risk profile is likely to support improved operating prospects and cash flow generation. We estimate that the company will generate about $600 million in free cash flow annually on a pro forma basis. Pentair has indicated that the new entity will assume approximately $275 million of Tyco Flow Control debt, net of cash, but has not announced further details of the pro forma capital structure. The ratings on Pentair reflect the company's "satisfactory" business risk profile and "intermediate" financial risk profile. Pentair is a diversified manufacturer of water treatment and storage products, and a producer of enclosures for sensitive electronic equipment. Pentair has solid market positions in several niche segments. It enjoys brand-name recognition, geographic reach, consistent and solid free cash flow, and an attractive mix of businesses with long-term potential for higher returns and cash flow. The company's credit measures have been stretched following its 2011 debt-funded acquisition of Clean Process Technologies (CPT), a division of Norit Holding B.V. As of Dec. 31, 2011, funds from operations to total debt was about 22%, versus our expectation of 30% for the current rating. CreditWatch The ratings are on CreditWatch with positive implications. Pending our review of the pro forma capital structure of the merged entity and management's long-term strategic and financial objectives, we could raise the ratings. In reviewing Pentair's credit rating, Standard & Poor's will also consider the potential integration risks related to the merger with Tyco Flow. While we expect to update the CreditWatch in the next three months, we do not anticipate resolving it until the transaction is complete. Related Criteria And Research -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Placed On CreditWatch To From Pentair Inc. Corporate credit rating BBB-/Watch Pos/-- BBB-/Stable/-- Senior unsecured BBB-/Watch Pos BBB- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Link this Share this Digg this Email Reprints

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