IHS Inc.'s (IHS) 'BBB' long-term Issuer Default Rating (IDR) is
unaffected by the company's recent acquisition announcements, according
to Fitch Ratings.
Fitch views IHS's $650 million acquisition of Oil Price Information
Service (OPIS) positively as it represents a new market within IHS's
Resources vertical. OPIS's focus on the downstream portion of the Energy
value chain provides IHS an entry into a segment that is less affected
by low oil prices. In addition, OPIS provides the potential for new
product offerings and revenue enhancement opportunities for IHS's
existing Energy businesses. OPIS is a leading source of U.S. refined
petroleum pricing information, news and analytics. It has the primary
spot price benchmarks for several downstream products and maintains the
most comprehensive database of U.S. wholesale petroleum prices. The
company's subscription-based offerings are provided to approximately
7,000 customers across the energy supply chain and are used within
commercial contracts and to settle trades.
The purchase price represents a 17.0x multiple of expected fiscal year
ended (FYE) Dec. 31, 2016 EBITDA of $38 million. The acquisition
multiple excludes approximately $150 million of tax benefits, which
would reduce the multiple to 13.0x. The acquisition will be funded with
Fitch believes the CDN$650 million (US$460 million) acquisition of
CARPROOF Corporation (CARPROOF) will benefit IHS's operating profile
given CARPROOF's consistent historical mid-teen organic revenue growth,
highly subscription-based recurring revenue stream, Adjusted EBITDA
margins of approximately 40%, leading Canadian market share, and
expected continued growth prospects. Fitch also believes the acquisition
provides IHS the ability to further scale its existing CARFAX business
through product and revenue enhancements across both businesses.
IHS announced that it had acquired CARPROOF on Dec. 28, 2015. CARPROOF,
founded in 2000, is a Canada-based company offering automotive vehicle
history reports to dealers, auto auctions, OEMs, lenders, insurers,
governments, law enforcement agencies and consumers. The purchase price
represents a 16.0x multiple of expected FYE Dec. 31, 2016 EBITDA of
CDN$41 million. The acquisition was funded with a mix of international
cash on hand and revolver borrowings.
Although pro forma total leverage of 3.9x exceeds IHS's stated total
leverage target of between 2.0x to 3.0x and the agency's expectations
for the rating, Fitch expects IHS will reduce debt and return total
leverage to within its stated target within the next 18-24 months for
several reasons. IHS has exhibited a consistent track record of levering
up for acquisitions following which it uses its free cash flow (FCF) to
delever to its leverage target. The company continues to generate
significant amounts of FCF, which will be used to repay debt. (The
amount of FCF available for debt repayment will be enhanced with the
announced pause in share buybacks.) Finally, IHS plans to use asset sale
proceeds to further reduce outstanding debt.
Importantly, IHS restated its commitment to that target and will work to
return total leverage to that range within the next 12-18 months using a
combination of sources. First, the company will use FCF for debt
repayment. Second, they announced a pause in share repurchase activity
until leverage is closer to the top end of the company's target. And
third, they plan to use proceeds from planned asset divestures
(discussed below) to repay additional debt.
IHS recently announced plans to sell its Operational Excellence and Risk
Management (OERM) and GlobalSpec businesses. This decision was reached
following a portfolio evaluation to help the company narrow its focus
around core information and analytic assets. OERM was primarily
enterprise software based and GlobalSpec had a heavy reliance on
advertising. Fitch expects IHS to complete these divestitures during the
first half of 2016. Fitch views the divestures positively as they are
not central to IHS growth plans and proceeds are to be used to repay
debt associated with the announced acquisitions.
IHS's ratings are supported by the company's significant FCF generation,
which affords the company meaningful financial flexibility and
de-leveraging capacity. For FYE Nov. 30, 2015, FCF amounted to
approximately $490 million. Fitch expects EBITDA to FCF conversion to
remain strong at around 65% over the ratings horizon driven by the low
capital intensity nature of the business. Fitch anticipates 2015 capital
expenditures will range between 5.5% and 5%.
Overall, IHS's financial flexibility and liquidity position are solid
considering its ability to generate consistent levels of FCF. The
company's liquidity position is further supported by available borrowing
capacity under its $1.3 billion revolver. Commitments under the revolver
are set to expire during July 2019. Balance sheet cash totaled
approximately $293 million as of Nov. 30, 2015, of which a significant
portion is held in foreign subsidiaries.
Approximately 20% of IHS revenues are transacted in foreign currencies.
IHS's maturity schedule is manageable, and Fitch believes that the
company has sufficient financial flexibility through expected FCF
generation, available borrowing capacity from the revolver, and capital
market access to address near-term maturities. Near-term scheduled
maturities consist primarily of scheduled amortization from the
company's term loans.
Positive Rating Action: Although Fitch does not foresee a positive
rating action at this time given the increased leverage associated with
the acquisitions, a positive rating action would likely coincide with:
--IHS publically adopting a more conservative financial policy
highlighted by an unadjusted gross leverage target of 2.5x or lower
(under Fitch's calculation);
--Positive operating momentum coupled with growing diversity of its
client base; and/or maintenance of FCF/gross debt above 15%.
Negative Rating Triggers:
--Material acquisitions that increase leverage over 4x without the
expectation of deleveraging below 3x within 18 months would pressure the
--Shareholder-friendly actions that drive leverage over 3.5x and/or a
weakening of IHS's operating profile as signalled by a persistent
decline in the company's FCF/gross debt metric approaching 10%,
deteriorating operating margins and revenue growth erosion also might
trigger a downgrade.
Fitch currently rates IHS as follows:
--Senior unsecured 'BBB'.
Additional information is available on www.fitchratings.com.
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