Fitch Ratings has placed Elanco Animal Health Inc. on Rating Watch Negative following the company's announced $7.6 billion acquisition of Bayer AG's animal health unit.
While the ratings agency noted the transaction's advantages, such as a more diverse pipeline and competitive position second only to No. 1 animal health company Zoetis Inc., Fitch expects "significant" risk in the deal's execution.
Elanco's leverage will also increase as a result, exceeding 5x at closing, and be between 4x and 5x in 2021 and 2022, assuming the combined company achieves some reduced expenses, according to Fitch's Aug. 20 release. Previously, Fitch had forecast leverage of sub 3x, with a positive outlook and potential upgrade from BB+ to BBB-.
"Elanco's management team is attempting to finalize its transition to being a stand-alone public company, complete a material productivity enhancement program and, close and integrate a significant merger at the same time," the agency stated.
Fitch added that the Bayer Animal Health acquisition could distract Elanco's management team, causing "deterioration in the core business."
Fitch said Elanco's current BB+ issuer default rating could be affirmed or downgraded one to two notches, depending on the deal's approval, timing and achievement of growth and expense reduction milestones.
A positive outlook or upgrade is unlikely, in light of the Bayer deal, Fitch wrote.
Fitch's next review of Elanco is expected around or before the deal's close, which is currently slated for the second half of 2020.
