Fitch puts STMicroelectronics on watch

Fitch Ratings said it placed STMicroelectronics NV's A- long-term issuer default and senior unsecured ratings on Rating Watch negative following the announcement of its wireless chipset joint venture with NXP BV.

The Rating Watch reflects the potential for negative rating pressure, including the possibility of a one-notch downgrade, given the implications of the transaction for balance sheet cash, financial flexibility and corporate strategy, the agency said. Although the deal is structured as a joint venture, STMicroelectronics will pay $1.55 billion from existing cash for an 80% controlling stake.

Fitch said the announced transaction does appear to make sense in industrial terms, given the scale it achieves for STMicroelectronics in a strategically important segment for the company and the assumption that it will boost earnings within the application specific group, reduce the overall weighting of euro-denominated costs and further improve asset efficiency.

The transaction, however, raises questions over future corporate strategy and the kind of financial policies that management may be prepared to follow, the agency said, adding that combined with ongoing concerns over a weakened industry outlook and dollar weakness in 2008, these broader strategic questions may increase pressure on the ratings.

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