Moody's Investors Serviced placed the debt ratings of General Dynamics Corporation (GD) under review for possible downgrade and the debt ratings of Newport News Shipbuilding Inc.
(NNS) under review for possible upgrade following the announcement of a definitive agreement for GD to acquire NNS in a cash tender offer for all NNS's outstanding shares.
The transaction is valued at approximately $2.6 billion, including approximately $500 million of existing NNS's debt. GD, continuing the consolidation process of the defense sector, plans to acquire NNS in a transaction which will combine its Navy shipbuilding
and submarine business with the submarine and aircraft carrier businesses
of NNS. This transaction would make GD the sole supplier of submarines and aircraft carriers for the U.S. Navy.
Moody's review will focus on the strategic benefits of this transaction for GD as well as on the potential synergies of combining the shipyard operations of the two companies. These potential synergies will be considered in the context of any limitations or requirements that may be imposed by regulators or the DOD as part of the approval process for the transaction.
In its review, Moody's will also consider the challenges which GD may face in integrating NNS into its operations, and the company's ability to avoid the difficulties that have occurred in other recent business combinations in the aerospace/defense sector.
Moody's said that GD's A2 rating has been supported by its solid financial condition and strong cash flow outlook relative to its modest debt position. The proposed acquisition will more than quadruple the company's debt burden while providing less substantial increments to earnings and cash flow. Moody's review of GD's ratings will assess the financial impact that this transaction will have on GD's balance sheet and debt protection measures, given the generally favorable outlook for defense spending by the U.S. government. The rating agency will also assess the company's ability to quickly reduce the additional debt from the strong cash flow generation of its existing core business units. Furthermore, Moody's will consider the company's ongoing growth initiatives, the potential for additional large acquisitions, and the company's overall financial strategy.
Moody's review of the ratings of NNS will focus on the impact that the transaction with General Dynamics would have on Newport News Shipbuilding's credit strength stemming from either implicit or explicit support from GD, including the potential for GD to legally assume or guarantee Newport News Shipbuildings Inc.'s existing debt. - (Reuters)