Fitch: Acquisition of NetSuite Does Not Affect Oracle's 'A+/F1' Ratings

Fitch Ratings believes the acquisition of NetSuite, Inc. (NetSuite) does not affect the ratings for Oracle Corp. (Oracle), including the 'A+' Long-Term Issuer Default Rating (IDR) and 'F1' Short-Term IDR. The Rating Outlook is Stable. A full list of current ratings follows at the end of this release.

Fitch believes the acquisition of NetSuite strengthens Oracle's cloud-based enterprise resource planning (ERP) offerings and, as a result, the company's hybrid-cloud environment solutions for enterprise customers. For NetSuite, the acquisition by Oracle bolsters investment in engineering and distribution, given Oracle's significantly greater scale and distribution platform. The $9.3 billion price tag is significant, given NetSuite's relatively small size and only modest impact on Fitch's expectations for Oracle's operating results and financial profile.

Revenue for the trailing 12 months (TTM) ended March 31, 2016 was $793 million, although Fitch expects NetSuite's top line will continue growing near 20% through the intermediate term, driven by strong product offerings and increasing customer penetration. Fitch estimates TTM operating EBITDA of $72 million, although we expect deferred revenue within the context of NetSuite's high recurring-revenue model should also continue growing by double digits and added $111 million to cash flow for the TTM. NetSuite's operating EBITDA margin is in the high single digits, although Fitch anticipates some standalone margin expansion from top line-driven absorption.

While the transaction fits Oracle's strategy to build its as-a-Service (aaS) capabilities, the NetSuite deal's size exceeds Fitch's previous expectations for annual acquisitions and roughly equal's Fitch's free cash flow (FCF) forecast. Oracle has yet to announce proposed funding for the acquisition but Fitch believes Oracle will have sufficient available cash and domestic FCF, although this may reduce amounts available for share repurchases for at least the near term.

The NetSuite deal also may require debt-financing incremental acquisitions, some of which may not provide sufficient profitability to reduce elevated leverage metrics within 12-18 months. Fitch continues to expect supplemental adjusted net leverage (SANL) at or below 1.5x through the forecast period and that negative rating actions could occur if Fitch expects Oracle to sustain SANL above 2x.

Oracle announced it entered into a definitive agreement to acquire Netsuite, a cloud-based ERP provider, for $9.3 billion in cash, or $109 per share. Oracle expects the transaction will close in 2016, subject to customary conditions, including regulatory approvals and NetSuite's stockholders tendering a majority of NetSuite's outstanding shares in the tender offer. In addition, closing is subject to a majority of NetSuite's outstanding shares not owned by NetSuite officers or directors, or affiliates of Larry Ellison being tendered in the offer.

Fitch currently rates Oracle:

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

--Revolving Credit Facility at 'A+';

--Senior Unsecured Debt at 'A+';

--Short-Term IDR at 'F1';

--CP at 'F1'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

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