OREANDA-NEWS. Weichai Power Co., Ltd.'s (Weichai; BBB/Stable) proposed acquisition of DH Services Holding (DH Services) through KION Group will not have an immediate impact on Weichai's rating, Fitch Ratings says.

Weichai (excluding KION Group) will maintain its net cash position even if the acquisition proceeds as planned, while KION Group will continue to pay dividends to Weichai. The acquisition will diversify Weichai's business and will not impact the company's ability to generate free cash flow.

On 21 June, Weichai announced that its 38.25%-owned KION Group will acquire DH Services for USD2.1bn, based on an agreed enterprise value of USD3.25bn. DH Services owns Dematic, which is a leading supplier of integrated automated technology, software and services to optimise the supply chain. The transaction will be initially funded by a bridge loan, which will subsequently be refinanced with equity and debt.

Weichai (excluding KION Group) has CNY9.7bn net cash at end-2015. The board has approved subscribing to up to EUR500m (CNY3.7bn) of shares if KION Group proceeds with equity issuance. Weichai (excluding KION Group) will remain in a strong net cash position even if it takes up its full share of the equity issuance.

KION Group's FFO-adjusted leverage would surge to about 3x by end-2016 from 0.8x at end-2015 assuming the transaction and 10% equity issuance is completed. However, Fitch believes KION Group can continue to deleverage even as it maintains its dividend payout ratio because the acquisition will enhance KION Group's strong ability to generate free cash flow.

DH Services will add a new business segment of material handling to KION Group, which sells forklifts, warehouse technology and associated services, and will help KION Group offer more products and more integrated solutions to clients. Moreover, KION Group will also be able to use Dematic's presence in the US to penetrate the US forklift market. Overall, Fitch expects KION Group's business profile to improve after the transaction.

Fitch may consider taking negative rating actions if Weichai (excluding Kion Group) moves into a net debt position as a result of supporting KION Group's acquisition. In addition, Weichai's credit profile would also be negatively affected if KION Group discontinues its dividend payout or fails to deleverage after the acquisition.