OREANDA-NEWS. Midea Group Co., Ltd.'s (Midea; A-/Stable) proposed acquisition of Kuka AG (Kuka) will not affect Midea's ratings, as the company has sufficient internal financial resources to fund the acquisition, Fitch Ratings believes. The acquisition will add to Midea's business diversification and will not impact the company's ability to generate FCF.

On 18 May Midea announced a voluntary offer to acquire a stake of more than 30% of Kuka at EUR115 per share. Kuka is a leading industrial automation company in Germany. At end-2015, Midea's cash and liquid assets totalled CNY38.5bn after deducting debts; sufficient to pay for maximum proceeds of not more than EUR4bn (CNY29.2bn). Fitch expects Midea can generate over CNY13bn FCF in 2016. As Midea's management stated they would like to keep Kuka as an independently listed company, the final acquisition proceeds are likely to be lower than CNY29.2bn.

Fitch expects Midea to continue generating positive FCF and to maintain a net-cash position after the acquisition. Fitch believes Midea will not invest further in Kuka after the acquisition, as Kuka can generate sufficient cash-flow for its own capex. We also do not expect Midea to increase capex for its existing operations.

The acquisition adds a new business segment of industrial robotics and automation, which is rapidly growing in China, to Midea. Midea's involvement may also help accelerate Kuka's expansion in China. However, with Kuka being an independently listed company, Fitch may consider analysing Midea's financial profile without consolidating Kuka, even if Midea ultimately consolidates Kuka as a subsidiary.