Can Abbott afford St. Jude and Alere? Moody's doubts it

Abbott CEO Miles White

Abbott Laboratories ($ABT) is seeking a new path to growth--and it's betting big that med tech is it. The company is taking on two of the largest M&A transactions in history at the same time: the more than $5.8 billion purchase of diagnostics player Alere ($ALR) that it announced at the start of February and the more than $25 billion buy of cardiovascular device player St. Jude Medical ($STJ) that was disclosed in late April.

But now Moody's is threatening to downgrade Abbott's rating if it goes ahead with the both the transactions as planned. In a May 3 note, the credit ratings agency said it's "likely" to downgrade Abbott if St. Jude and Alere close as its debt would triple. This follows news last week that Abbott already has been seeking a way out of the Alere deal.

First, Abbott chairman and CEO Miles White made some half-hearted comments on an April 20 earnings call that raised Wall Street concerns that the deal might fall through, sending Alere stock down. Then last week, Alere said it had rejected a $50 million offer from Abbott to terminate the deal, which the latter reportedly is attributing to a federal regulatory investigation of Alere's international sales practices.

Abbott has been looking for a way to boost revenue growth since it split from AbbVie ($ABBV), which took the R&D-driven new therapeutics with it, at the start of 2013--leaving Abbott with Diagnostics, Nutrition, Established Pharmaceuticals and Medical Device businesses.

It's been aggressive in recent years in med tech deal-making, with rapid-fire acquisitions, investments and partnerships in smaller, innovative companies. But now it's moved on to the massive consolidation that has characterized the industry in the last few years as med techs seek to become much bigger to better capture the needs of their hospital customers by offering lower prices and scaled offerings.

Moody's remains skeptical of Abbott doing both the Alere and St. Jude deals at the same time.

"Abbott will be taking on two of the largest transactions in its history at the same time. Beyond high execution risk, this raises uncertainty about Abbott's longer-term M&A strategy once it deleverages," the credit ratings agency said in a long note devoted to the subject.

It concluded, "Abbott's A2/Prime-1 ratings remain on review for downgrade. Its ratings will likely be downgraded to Baa3/Prime-3 with a stable outlook if both deals close as planned."

The credit ratings agency notes that the totals for the Abbott buys are substantially boosted by the consideration of each of the company's debt--St. Jude to a whopping $31 billion, including $5.7 billion of net debt, and Alere to $8.4 billion, including about $2.6 billion of net debt.

Moody's expects Abbott to fund St. Jude with about $12.4 billion in incremental debt, $11.2 billion in equity and the remainder with cash.

It's not convinced that Abbott has strong enough cash flow to deleverage easily after taking on the debt for both deals. "Abbott's ability to repay debt will be limited by relatively weak free cash flow. In addition to a substantial increase in deal-related interest expense and capital expenditures, Abbott's decision to keep paying its high cash dividend will limit deleveraging," observed the Moody's note. "Unless the company would be willing to repatriate its disproportionately high levels of non-US cash, Abbott would need to borrow to fund its shareholder initiatives and capital expenditures."

The St. Jude deal is slated to close in the fourth quarter while the Alere deal was originally expected to also close by year end.

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