OREANDA-NEWS. Fitch Ratings has affirmed the ratings for HP Inc. (HP), including the Long - and Short-Term Issuer Default Ratings (IDR) at 'BBB+/F2', on HP's acquisition of Samsung's printer business. The Rating Outlook is Stable. Fitch's action affects $10.8 billion of total debt, including the undrawn $4 billion revolving credit facility (RCF). A full list of ratings follows at the end of this release.

Fitch expects the acquisition of Samsung's printer business to strengthen HP's modest position in the A3 copier segment by adding laser print intellectual property (IP) and engines to HP's product offerings. The deal also adds Samsung's $1.8 billion of fiscal 2015 revenue, primarily in the A4 segment, bolstering HP's strong A4 segment leadership. Operating EBITDA was not disclosed but Fitch believes Samsung's printer business profitability is likely well below that of HP's, given lower scale.

HP believes there are meaningful cost synergies related to the deal by leveraging the A4 segment supply chain and elimination of duplicate non-revenue-generating costs. HP expects $150 million to $200 million of costs associated with the integration, which will be paid within the first three years after close. At the same time, Fitch believes integration risks are meaningful, given potential complexities around cross-border deals. HP will migrate Samsung's A4 segment products to HP branded products over time, benefitting the company's relationship with Canon, which provides original equipment manufacturer (OEM) services for HP's A4 segment products.

HP announced it entered into a definitive agreement to buy Samsung's printer business for $1.05 billion in cash. Fitch believes HP is likely to use available cash (the majority of which Fitch believes is located outside the U. S. as of July 31, 2016) to fund the transaction. In connection with the deal, Samsung has agreed to buy $100 million to $300 million of HP common stock after the deal closes. HP expects to close the acquisition within 12 months, subject to regulatory approvals and customary closing conditions.

Fitch expects mixed operating results for HP in the near term with restructuring-driven profit margin expansion and solid cash flow offsetting revenue growth below Fitch's expectations at separation from Hewlett Packard Enterprise. HP's solid third fiscal quarter (3Q16) performance in personal computers (PCs) may have signalled an inflection point after the Personal Systems Group (PSG) segment declined by mid-single digits in constant currency in 1H16. The company and other top providers should continue gaining share in PC shipments with HP performing particularly well in premium and gaming models.

Constant currency organic revenue declines for the Printing segment should continue moderating through fiscal 2017, driven by secular headwinds in consumer printing and excess channel inventory for supplies that caused the company to recently shift its go-to-market strategy. HP is focusing on profitable growth, which has contributed to profit margin expansion, and growth markets, including 3D printing, packaging and the A3 segment. The acquisition should enable HP to address the business market with both laser and proprietary PageWide technology, providing optimal technologies across departments.

KEY RATING DRIVERS

--Leading Share Positions: Fitch believes HP's ratings benefit from the company's market leadership in A4 segment laser and inkjet printing and PCs, particularly in the U. S. HP's extensive installed base of inkjet printers drives significant recurring revenue from replacement ink. The company's market positions also result in significant scale, enabling cost leadership, supporting research and development (R&D) investments and brand equity, particularly within consumer markets.

--Solid Annual Free Cash Flow (FCF): Fitch expects solid annual FCF of $1.5 billion to $2.5 billion, with potential upside from cash taxes, up from Fitch's original expectations of more than $1 billion at separation. Greater than expected profit margin expansion from restructuring, Fitch's expectations for improved working capital efficiency following the company's inkjet supplies model shift and HP's capex-light model enabled by OEM printing and EMS PC relationships will drive solid FCF.

-- Secular Demand Headwinds: Fitch expects secular demand headwinds within HP's core markets will continue pressuring organic revenue growth. Fitch expects the A4 segment, in which HP is a leader with 30%-35% share, will continue contracting within the consumer market, while the business market should remain stable. HP expects higher-margin ink supplies will stabilize by the end of fiscal 2017. PC unit shipments are expected to continue declining but moderate (to low - from mid - single digits) through the intermediate term from an aging PC installed base and HP to benefit from share consolidation.

--Significant Offshore Cash Build: Fitch believes HP's significant offshore cash balances could drive incremental borrowings to fund domestic cash uses and pressure credit protection measures. HP has committed to returning to shareholders pre-dividend FCF not used for acquisitions. Given Fitch's estimate that HP generates the vast majority of FCF outside the U. S., the company continues relying upon various strategies to access foreign cash, which could include repatriation, to support shareholder returns. Should HP exhaust tax-efficient strategies to access foreign cash, the company would need to curtail shareholder returns or borrow to maintain its current pace of stock buybacks.

--Reasonably Conservative Credit Metrics: The aforementioned potential financial policies adjustments notwithstanding, Fitch expects HP to manage debt levels to maintain reasonably conservative credit protection measures. Specifically, Fitch expects total leverage (total debt/operating EBITDA) below 1.5x through the intermediate term, although Fitch's negative rating sensitivity provides headroom up to 2x. Fitch estimates total leverage was approximately 1.3x for the latest-12-months (LTM) ended July 31, 2016.

--Significant Revenue Diversification: Fitch expects HP's significant and well-diversified installed base and addressable markets reduces operating volatility, despite formidable demand headwinds in core markets and exposure to cyclical demand patterns. The company's initiatives in the A3 segment for business customers could add modest volatility, given business customers' uneven spending patterns. However, the company continues to have a healthy mix of consumer and commercial customers, a variety of products across core end markets, and significant sales outside the U. S.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for HP include:

--Constant currency organic revenue growth of 3% in fiscal 2016, driven by continued but moderating headwinds in printing and stabilizing PC demand;

--Positive constant currency organic revenue growth by the end of fiscal 2017 and the continuation of positive constant currency organic growth through the intermediate term, driven by stabilizing PC shipments, healthier channel inventory for inkjet supplies and expansion into A3 segment, 3D printing and graphics;

--Operating EBITDA margins expanding into the double digits, driven by restructuring actions and a focus on profitable growth;

--Relatively consistent debt levels, given total leverage is already approaching HP's articulated 1.5x target; and

--FCF used for acquisitions and shareholder returns, supported by ongoing access to offshore cash.

RATING SENSITIVITIES

The ratings could be downgraded if Fitch expects:

--Negative constant currency organic revenue growth beyond the near term, likely from share losses in the A4 printing segment, weaker than expected PC shipments, extended ink supplies inventory glut or lack of traction in the A3 segment;

--Total leverage above 2x, likely from incremental borrowing to support ongoing shareholder returns, given the majority of FCF is offshore.

The ratings are unlikely to be upgraded in the absence of Fitch's expectations for:

--Sustained positive revenue growth, driven by significant penetration in growth markets, offsetting secular declines in core printing and PC markets;

--HP will sustain operating EBITDA margins in the mid-teens, driving significantly higher annual FCF and enabling the company to lower the total leverage target closer to 1x.

LIQUIDITY

Fitch believes HP's liquidity is sufficient as of July 31, 2016 and supported by:

--$5.6 billion of cash and investments, the vast majority of which Fitch believes is located outside the U. S.;

--An undrawn $4 billion RCF that fully backstops commercial paper (CP) programs in the U. S. and Europe.

Fitch's expectation for $1.5 billion to $2.5 billion of annual FCF also supports liquidity, although Fitch estimates a significant majority of cash flow is offshore.

Total debt was $6.8 billion at July 31, 2016 composed of senior unsecured debt with staggered debt maturities.

Fitch affirms the following:

HP Inc.

--Long-Term IDR at 'BBB+';

--Senior unsecured revolving credit facility at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Short-Term IDR at 'F2';

--CP Rating at 'F2.