CHICAGO--()--Fitch Ratings has placed Constellation Brands, Inc.'s (STZ) debt ratings on Rating Watch Negative. Fitch rates the company as follows:
--Long-term IDR 'BB+';
--Secured bank credit facility 'BB+';
--Senior unsecured notes 'BB+'.
This rating action affects approximately $4.0 billion of total debt at Nov. 30, 2012.
KEY RATING DRIVERS
On Feb. 14, 2013, Constellation Brands announced in a revised agreement that it would acquire AB InBev Piedras Negras brewery and perpetual rights to the Corona and Modelo brands in the U.S. for $2.9 billion in addition to the remaining 50% of Crown Imports LLC (Crown), a 50 - 50 joint venture with Grupo Modelo, it does not own for USD 1.85 billion. The total combined purchase price will be $4.75 billion. Constellation also plans to invest approximately $400 million to expand the Piedras Negras facility, which will then enable it to supply 100% of its needs for the U.S. marketplace. Piedras Negras currently fulfills approximately 60% of Crown's current demand. The Crown portfolio of brands includes Corona Extra, which according to the company is the best-selling imported beer and the sixth best-selling beer overall in the industry, and Corona Light - the leading imported light beer. The transaction is subject to regulatory approval from the US and Mexico.
AB InBev and Constellation have also agreed to a three-year transition services contract to ensure the smooth transition of what is categorize as a world class facility. The companies claim that the Piedras Negras is a world-class brewery, which is fully self-sufficient, utilizes top-of-the-line technology and was built to be readily expanded to increase production capacity. Fitch believes that there is good strategic rationale for the transaction, given the strong cash flow generative ability of Crown, the growth of imported beer sales in the U.S., and the strength of the Corona brand.
The Rating Watch Negative reflects that upon closing of the transaction Constellation's leverage (defined as total debt-to-EBITDA) will increase to about 6x, which will be high for the rating category. The company expects leverage to decrease to its targeted range of 3 - 4x within 2 - 3 years following the close of the transaction. Fitch estimates that total EBITDA of the acquired operations is approximately $600 million and that free cash flow (FCF) is in the range of $400 - $450 million. Annual combined FCF is estimated to range between $500- $600 million for the first couple of years after allowing for incremental CAPEX. These estimates are based on the company's disclosure and Constellation's 50% share of Crown's cash distribution. For the LTM period ending Nov. 30, 2012, Constellation 50% share of the Crown cash distribution was approximately $220 million. Debt to EBITDA, including the equity income from Crown was 4.4x for the period and EBITDA plus equity income to interest expense was 4.1 x.
Constellation indicated that it had fully committed bridge financing in place to complete the acquisition. Permanent financing is expected to consist of a combination of senior notes and term loans, with the remainder of the funding coming from the company's existing revolving credit facility, accounts receivable securitization facility and available cash.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Should the transaction be consummated, ratings could be downgraded within the 'BB' category. Further confirmation of potential FCF generation and/or the application of proceeds from the potential divestment of assets may limit the magnitude of a negative rating action.
Future developments that may, individually or collectively, lead to a positive rating action include:
--A positive rating resolution is not likely, due to the likelihood of heightened leverage if the transaction is consummated. However beyond the intermediate term, management's commitment to maintain leverage within their stated goal of 3 -4x and conservatively fund a portion of future large acquisitions with equity could result in future upward migration of ratings.
The Negative Watch could be removed and ratings maintained at current levels with a Stable Outlook if the transaction is not consummated.
Additional information is available at www.fitchratings.com.