Fitch: High Yield FBR & Consumer Sector Handbook Focuses on Heightened M&A

CHICAGO--()--Fitch Ratings has published its third edition of the 'U.S. High Yield Food, Beverage, Restaurant (FBR) and Consumer Products Handbook', a 290-plus page report that provides a comprehensive analysis of leveraged finance companies within the sectors.

The report profiles 20 high yield FBR and Consumer Products issuers. Each company report includes Fitch's assessment of the business and financial profile, as well as key selected financial data, a detailed debt organizational chart, and covenant analyses. Post Holdings, Inc. (Post), Jarden Corporation, and Alliance One International Inc., all of which are privately rated, are new additions to the book this year (see below for a full list of issuers included in this year's edition).

An important theme discussed in this year's report is merger and acquisition activity, particularly in the packaged foods and consumer products industries, and accompanying transaction multiples. Most of these companies are wedded to the mature U.S. consumer market, where products have high household penetration, the promotional environment has been elevated for a number of years and growth prospects are limited. In order to grow and to become more relevant in an increasingly concentrated retail channel, many issuers are making acquisitions or are seeking to merge with other firms.

Fitch has also observed an uptick in divestitures, the exit of low margin products, or a severe pruning of business segments, by large investment grade issuers due to management's desire to divest laggards that may not meet return objectives or to monetize undervalued assets. Specifically, the Big Three package good companies, Procter and Gamble Co. (P&G, Not Rated), Unilever ('A+'/Stable Outlook), and Nestle ('AA+'/Stable Outlook) are downsizing. Given their scope, as each of the above mentioned firms currently generates more than $55 billion in revenues, discards are likely to be sizeable and could be attractive to high-yield issuers.

Constant M&A and divestiture activity is resulting in a steady state of above-average event risk across the sector's high-yield firms. Fitch's treatment of M&A risk varies depending on whether acquisitions have been factored into expectations but large transactions are likely to always generate a ratings review. Fitch is cautious of divestitures of stable, higher-margin, or faster-growing operations if the remaining businesses exhibit operating earnings volatility, despite significant debt reduction. These actions could increase business risk and to some extent diminish credit quality, even though shareholder value may have been enhanced.

The highly accommodative and liquid capital markets combined with the mantra for growth provides strong ammunition for increased M&A activity across the FBR and Consumer Products sector and could potentially create a feeding frenzy among potential acquirers for Big Three castoffs. As such, Fitch believes transaction multiples could rise or be at the high end of historical averages. A clear example of upward pressure on purchase multiples was seen with Tyson Foods, Inc.'s. (Tyson; 'BBB'/Stable Outlook) pending buyout of The Hillshire Brands Co. ('BBB'/Stable Outlook) where the initial offer by Pilgrim's Pride Corp. was 12.5x but Tyson's winning bid was nearly 17x. Other notable transactions year-to-date in 2014 include Post's acquisition of Michael Foods, Inc. for just under 10x and Del Monte Pacific Limited's purchase of Del Monte Corp.'s (now known as Big Heart Pet Brands, 'B'/Stable Outlook) consumer products business for approximately 10x.

Leverage for the group of companies included in Fitch's High Yield FBR and Consumer Products Handbook has remained stable versus the prior year, with most firms grouped between 4.0x to 6.0x. Barring transformative acquisitions, Fitch anticipates a gradual decline in leverage during the near-to-intermediate term as several companies have established a targeted leverage range below current levels. Moreover, liquidity is more than adequate to satisfy near-term fixed obligations for the issuers covered in this report. Most of these issuers have refinanced high-coupon debt, engaged in multiple term loan re-pricings, and extended maturities. Amended credit facilities have also increased borrowing capacity or loosened restrictive covenants, providing most high-yield issuers with the financial flexibility needed to participate moderately in acquisition opportunities.

The following companies are discussed in this report:

--ACCO Brands Corp.

--Alliance One International Inc.

--ARAMARK Corporation

--Bloomin' Brands, Inc.

--Burger King Worldwide, Inc.

--Constellation Brands, Inc.

--Dean Foods Company

--Big Heart Pet Brands

--DineEquity, Inc.

--Dunkin' Brands Group, Inc.

--H.J. Heinz Company

--Jarden Corporation

--JBS S.A.

--Keurig Green Mountain, Inc.

--Pinnacle Foods Inc.

--Post Holdings, Inc.

--Revlon Consumer Products Corporation

--Spectrum Brands, Inc.

--Weight Watchers International, Inc.

--Wendy's Company (The)

The full report 'U.S. High Yield Food, Beverage, Restaurant and Consumer Products Handbook' is available at www.fitchratings.com or by clicking on the link below.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research: U.S. High Yield Food, Beverage, Restaurant, and Consumer Products Handbook (Event Risk: Merger and Acquisition Activity Continues to Dominate the Landscape)

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Contacts

Fitch Ratings
Wesley E. Moultrie II, CPA
Managing Director
+1-312-368-3186
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Judi M. Rossetti, CFA/CPA
Senior Director
+1-312-368 2077
or
William Densmore
Senior Director
+1-312-368 3186
or
Michael Zbinovec
Senior Director
+1-312-368 3186
or
Carla Norfleet Taylor, CFA
Director
+1-312-368 3195
or
Grace Barnett
Director
+1-212-908-0718
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Wesley E. Moultrie II, CPA
Managing Director
+1-312-368-3186
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Judi M. Rossetti, CFA/CPA
Senior Director
+1-312-368 2077
or
William Densmore
Senior Director
+1-312-368 3186
or
Michael Zbinovec
Senior Director
+1-312-368 3186
or
Carla Norfleet Taylor, CFA
Director
+1-312-368 3195
or
Grace Barnett
Director
+1-212-908-0718
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com