S&P Global maintains TE Connectivity's 'A-' rating despite Richards Manufacturing acquisition
Investing.com -- S&P Global has affirmed the 'A-' credit rating of TE Connectivity (NYSE: TEL ) Plc (TE) despite the company's recent announcement of its agreement to acquire Richards Manufacturing Co., a provider of electrical and gas utility grid products. The $2.3 billion deal, aimed at bolstering TE's product range for the U.S. energy end-market, is expected to close in the third quarter of fiscal 2025, ending on Sept. 26, 2025. The acquisition will be financed through cash reserves and additional debt.
S&P Global anticipates that Richards Manufacturing will slightly increase TE's EBITDA margins. Pro forma closing leverage is estimated at about 1.6x on an S&P Global Ratings' adjusted basis as of Dec. 27, 2024. Due to EBITDA growth and robust free operating cash flow (FOCF), leverage is expected to decrease to around 1.3x in fiscal 2026.
The stable outlook is based on the expectation that AI data center buildouts and contributions from recent acquisitions will support revenue growth of 2%-3% this fiscal year and 5%-7% in fiscal 2026. With EBITDA margins maintained at about 25%, this is believed to support solid FOCF and S&P Global Ratings' adjusted leverage of less than 2x.
TE is expected to have enough capacity to complete the acquisition without negatively impacting the rating. Despite being the company's largest acquisition since Deutsch Group in 2012, it does not affect the ratings due to the significant financial cushion that TE has built. The company has maintained low leverage of around 1x since fiscal 2022, supported by strong FOCF generation and a conservative financial policy that has focused more on organic growth.
TE has also improved EBITDA margins to the mid-20% area in fiscal 2024, higher than historical levels of around 20%, due to cost efficiencies and price optimizations. Revenue growth in the Industrial Solutions segment this fiscal year is expected to exceed the current weakness in the Transportation Solutions segment, driven by strong AI-related demand and acquisition contributions.
TE has historically focused more on shareholder returns compared to its more acquisitive competitor, Amphenol (NYSE: APH ). The long-term capital allocation framework is expected to continue returning two-thirds of its reported FOCF to shareholders and use the rest for acquisitions and growth investments.
S&P Global could downgrade TE if its operating performance and EBITDA base deteriorate significantly due to operational mishaps, competitive pressures, or business volatility in its end markets, increasing S&P Global Ratings' adjusted leverage above 2x, or if it adopts a more aggressive shareholder return policy or acquisition strategy that raises leverage, providing insufficient flexibility to absorb a cyclical downturn while maintaining leverage below 2x.
The rating could be raised if the company successfully executes its growth strategies as characterized by sustained product content increases across its end-markets and balanced financial policies, and keeps leverage below 1x even while withstanding a cyclical downturn.
TE designs and manufactures products that connect and protect the flow of power and data, including connectors, sensors, and antennas, inside consumer and industrial products. Its main business segments are Transportation Solutions and Industrial Solutions. TE has an established manufacturing presence in over 25 countries worldwide, including China, and global sales distribution. Its revenues are largely derived in Europe, the Middle East, and Africa, Asia-Pacific, and the Americas.
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