Fitch Gives Oracle Negative Rating Following Plans to Acquire Cerner

Following Oracle’s agreement to acquire EHR vendor Cerner, Fitch Ratings has placed the corporation on rating watch negative as Fitch’s previous debt reduction expectations for the transaction have changed.

Oracle recently announced its plans to acquire Cerner through an all-cash tender offer of $28.3 billion in equity. The company said that it hopes to address clinician burden, lower healthcare costs, and improve patient privacy and outcomes through the acquisition of the EHR vendor.

However, Cerner has an outstanding debt of approximately $1.8 billion, according to Fitch. In 2020, the company generated $5.5 billion in revenue, EBITDA of $1.7 billion, and post dividend free cash flow of $635 million. Oracle’s proposed acquisition transaction values Cerner at 17.5x EBITDA.

“Fitch's ratings are supported by the expectation that Oracle will reduce its debt at a pace aligned with its debt maturities and use its excess cash for shareholder returns or acquisitions,” Fitch wrote. “The announced agreement to acquire Cerner could result in the company deviating from its previous plan to reduce its debt to $76 billion by FY2022.”

The negative watch is mainly due to Oracle potentially straying from Fitch’s debt reduction expectations. According to Fitch, the corporation may only experience a rating change if it reduces its financial leverage following the acquisition.

Additionally, Oracle may face competition from other software companies such as Workday, Inc and Salesforce.com, Inc.

Fitch also voiced some positive concerns surrounding Oracle and its acquisition of Cerner.

In the long term, the merger has the potential to help Oracle grow its position in the healthcare industry and in the near term, Cerner’s EHR could benefit from Oracle’s cloud infrastructure.

In addition, Fitch expects Oracle to perform well financially in the future. Oracle generates around $11 billion of post-dividend free cash flow each year and is expected to see significant recurring revenue and free cash flow in fiscal year 2022. Oracle’s customer base, high renewal rate, and increasing scale of its cloud products will help the company achieve these financial goals, Fitch said.

Additionally, as Oracle’s cloud products grow and on-premise products decline, Fitch expects its operating EBITDA margins to remain stable in the high 40s.

Depending on Oracle’s future activity, Fitch could upgrade Oracle’s rating to a positive one. If Oracle’s gross leverage remains below 2.5x, its revenue growth is at or above mid-single digits, and its EBITDA margin remains stable at over 45 percent, its rating could increase.

However, the rating may downgrade if Oracle’s gross leverage remains above 3.0x, its revenue declines over a sustained period of time, or its EBITDA margin remains below 40 percent.

Oracle’s acquisition of Cerner is expected to close in 2022, subject to receiving certain regulatory approvals. The results of the deal could potentially alter Oracle’s rating from Fitch.