Fitch Affirms Coca-Cola Enterprises at 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Coca-Cola Enterprises, Inc.'s (CCE's) ratings including the 'BBB+' Issuer Default Rating (IDR). The affirmation follows a merger announcement that combines the bottling operations of CCE, Coca-Cola Iberian Partners and Coca-Cola Erfrischungsgetranke AG into a new UK domiciled Western European bottler named Coca-Cola European Partners (CCEP). A full list of rating actions follows at the end of this release.

The Rating Outlook is Stable. At July 3, 2015, CCE had $4.5 billion of total debt.

KEY RATING DRIVERS

Combination Improves Sustainability of Underlying Operations

CCEP will have pro forma 2015 revenue and EBITDA of $12.6 billion and $2.1 billion respectively, and Fitch views the new bottling combination as a positive long-term step toward improving the sustainability of cash generation for the Coca-Cola System's underlying business operations in Western Europe. The merger increases operational scale, creates synergy opportunities, better leverages best practices and improves operational strategy across 13 contiguous countries. This should improve efficiencies, thus increasing CCEP's ability to invest behind the brands. Fitch believes The Coca-Cola Company's 18% ownership position, which includes two board seats, should also enhance the strategic alignment within the Coca-Cola system between the two companies. The transaction is expected close in the second quarter of 2016.

Operating Performance Challenged

CCE is facing persistent headwinds with the macro environment characterized by reduced consumer spending, higher unemployment and the negative effects of austerity programs in Western Europe. In addition, structural challenges due to health and wellness trends are affecting the demand for carbonated soft drinks in developed markets which constitute 87% of CCE's, 80% of Coca-Cola Iberian Partners and 86% of the German operations total volume. Consumer behavior and purchasing decisions also continue to be shaped by post-recession aftereffects with more consumers embracing smaller and more frequent shopping trips. Many consumers remain cash conscious, seeking good value for their spending patterns although brands remain important to consumers as non-alcoholic beverages do benefit from the growing premium trend.

Reflecting these challenges, CCE's volume was flat during the first half of 2015 after adjusting for the impact of a selling day shift and bottle/can price per case declined approximately 1.5%. For the full year, CCE expects net sales and operating income growth will be slightly positive on a currency-neutral basis. Fitch expects the current operating challenges to at least continue over the near term depending on the market, thus constraining revenue, operating income and FCF growth. Currency volatility is expected to lessen for CCEP due to the change in domicile to the UK from the U.S.

The challenging environment thus places more importance on the need for Western European consolidation to improve efficiencies, operational scale and focus on synergy opportunities to improve their ability to invest behind the brand. Fitch currently assumes the majority of synergy benefits will be reinvested in the business. Current restructuring efforts within the Iberian Partners and German operations should also benefit the new entity.

Leverage High

Pro forma consolidated gross leverage for CCEP at transaction close is estimated at approximately 3.7 times (x) to 3.8x, which is high for the ratings. However, Fitch believes CCEP's FCF generation will be substantially higher than CCE on a standalone basis, thus offering improved flexibility to repay debt. As such, Fitch believes CCEP has the ability to reduce debt to bring gross leverage under 3x by the end of 2017, which is within Fitch's rating sensitivities.

The $3.3 billion of new transaction debt will be issued at the new parent company, CCEP. CCE has not indicated whether a new guarantee structure will be implemented as the existing debt at CCE will remain outstanding. CCE's debt does not contain any change of control provisions. The expected $3.3 billion of new transaction debt would be structurally subordinate to CCE's existing debt without the benefit of a new guarantee. Fitch expects any details around potential guarantees would be announced prior to transaction close.

Strong Market Position

CCE's ratings reflect its stable cash flows, strong market position, and exclusive right to manufacture, sell and distribute Coca-Cola brand beverages in Western Europe. Coca-Cola products have leading market share that allows for premium pricing of the Coca-Cola brands within CCE's non-alcoholic ready-to-drink portfolio for each of its territories. For the last 12 months, CCE generated approximately $7.6 billion of net sales with almost two thirds of revenue coming from its largest two markets, Great Britain and France.

KEY ASSUMPTIONS

--Underlying pro forma operating performance trends will remain stable with flat to low single digit top line growth and modest operating income growth on a currency neutral basis expected in 2015 and beyond;

--FCF generation for CCE of approximately $400 million in 2015;

--CCEP's Pro forma gross leverage at transaction close in mid-2016 of 3.8x, with leverage at the end of 2017 expected to decline under 3.0x on debt repayment;

--CCEP will refrain from material share repurchases until leverage is back within its net leverage target range of 2.5x-3.0x;

--Fitch's preliminary forecast for CCEP assumes synergies are fully reinvested in the brands.

RATING SENSITIVITIES

Fitch does not expect a positive rating action based on CCE's current financial policies. Future developments that could, individually or collectively, lead to a positive rating action include:

--Gross debt-to-operating EBITDA consistently in the low 2.0x range or net leverage below management's targeted range of 2.5x-3x due to operating income growth and continued strong FCF generation that results in debt reduction;

--Significant additional geographic diversification concurrent with lower leverage.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Gross debt-to-operating EBITDA sustained above 3x that could be driven by:

--Persistent declines in volumes concurrent with material margin compression and significantly lower FCF and EBITDA given mature economies and persistent macroeconomic headwinds, as well as an accelerated shift in consumer purchasing preferences away from carbonated soft drinks or

---Change in financial policy that result in material debt-financed share repurchases or dividends;

--Leverage remains outside its targeted range for longer than an 18-month period following a material debt-financed acquisition.

LIQUIDITY

CCE has good liquidity of approximately $1.4 billion at the end of the second quarter 2015, inclusive of $418 million of cash and full availability under the firm's $1 billion multi-currency credit facility, expiring in September 2017. FCF (cash from operations less capital spending less dividends) for the LTM period was $392 million. For 2015, Fitch expects FCF in a similar range. CCE has hedged a portion of its cash flow sources to reduce foreign exchange risk that could affect the cash distribution.

CCE has materially increased the dividend during the past five years from $0.48 to $1.12, with the latest increase of 12% per share for 2015. Fitch expects annual dividend payments in excess of $250 million for the year to translate to the high end of its dividend payout (dividend-to-earnings) range of 35% to 40%. Expectations are for CCEP to have a dividend payout in the 30-40% range. CCE also has aggressively repurchased an average of almost $875 million shares annually during the last four years. At the end of the first half 2015, CCE had repurchased $500 million outstanding shares. CCE has indicated that the company will refrain from material share repurchases until leverage at CCEP is back within its net leverage target range of 2.5x-3.0x.

FULL LIST OF RATING ACTIONS

Fitch affirms the ratings for Coca-Cola Enterprises Inc. as follows:

--Long-term IDR at 'BBB+';

--Short-term IDR at 'F2';

--Bank credit facility at 'BBB+';

--Senior unsecured notes at 'BBB+';

--Commercial paper at 'F2'.

The Rating Outlook is Stable.

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

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Parent and Subsidiary Rating Linkage Fitch¬タルs Approach to Rating Entities within a Corporate Group Structure - Effective from 5 August 2013 to 6 August 2015 (pub. 05 Aug 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989190

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Contacts

Fitch Ratings
Primary Analyst
William Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
or
Committee Chairperson
Monica Aggarwal
Managing Director
+1-212-912-0282
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
William Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
or
Committee Chairperson
Monica Aggarwal
Managing Director
+1-212-912-0282
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com