Fitch Places Molson Coors on Rating Watch Negative

CHICAGO--()--Fitch Ratings has placed Molson Coors Brewing Company's (Molson Coors) long-term Issuer Default Rating (IDR) and senior unsecured ratings at all Molson Coors entities on Rating Watch Negative. The rating actions follows the announcement by Molson Coors that it has entered into a definitive agreement with Anheuser-Busch InBev SA/NV (AB InBev) to purchase SABMiller plc's (SABMiller) 58% stake in MillerCoors for $12 billion.

The agreement also includes the ownership of the Miller Brand Family globally, an estimated $2.4 billion present value of cash tax benefits, and perpetual, royalty-free U.S. rights to all imported and licensed brands including Peroni, Pilsner Urquell, Foster's and Redd's. Transaction value is approximately 11.5x pro forma 2014 EBITDA of the combined 58% stake in MillerCoors ($965 million) and the Miller global business ($70 million) without consideration for expected tax benefits and cost synergies.

Molson Coors will finance the deal with a combination of existing cash, new debt (75%-80% of transaction value) and new equity (20%-25%). The transaction is conditioned upon the closing of AB InBev's acquisition of SABMiller and necessary regulatory approvals that is expected to occur in the second half of 2016.

Fitch currently rates Molson Coors long-term IDR 'BBB'. As of Sept. 30, 2015, Moslon Coors had $3 billion of debt outstanding. A full list of ratings is shown below.

KEY RATING DRIVERS

Significant Increase in Leverage

The Rating Watch Negative reflects the projected significant increase in Molson Coors' financial leverage. On a pro forma basis, Fitch expects pro forma leverage (total debt to EBITDA) in the low-to-mid 5x range at the time of transaction closing. This compares to expectations for Molson Coors leverage of 2.4x (total debt-to-operating EBITDA plus LTM equity income) for 2015.

Based on preliminary projections, Fitch expects Molson Coors leverage to improve to the low-4x range within 24 months post transaction close, due largely to the expected debt repayment from the significant FCF generation that will continue to benefit from on-going cost reductions. Given the significant increase in leverage, Molson Coors plans to discontinue share repurchases, maintain the current dividend per share level and suspend its dividend payout target of 18-22% in order to focus on debt reduction.

Upon completion of the transaction, the potential exists for a downgrade of up to two notches for the ratings of Molson Coors. The final ratings will depend on actual debt/equity financing mix, pro forma leverage at close, volume and pricing trends for Molson Coors flagship brands in their largest markets (U.S., UK and Canada), macroeconomic outlook within key geographic regions, and the degree of visibility for a sustainable de-leveraging path using cash flow during the first two years post-completion.

Molson Coors has a good track record of meeting deleveraging expectations following signficant acquisitions. The deleveraging following the 2012 StarBev transaction was ahead of Fitch's expectations, thus demonstrating a strong commitment for a disciplined financial policy. The lower execution risk of this transaction, familiarity with the MillerCoors joint venture and the good history on executing cost savings initiatives at both MillerCoors and Molson Coors should benefit cash generation.

Material Strategic Benefits

Up to now, the MillerCoors joint venture ownership structure has limited further meaningful synergy opportunities between MillerCoors and Molson Coors in the areas of procurement, supply chain, shared services, distribution and back office. This has resulted in lower profitability relative to its larger peers with the only clear path for significant synergy opportunity through full ownership. Molson Coors' base case projection expects $200 million in annualized synergies delivered by the fourth year in addition to the cost savings expected within the embedded business thus increasing Molson Coors' ability to reinvest behind the core brands. Over $1.3 billion of annualized cost savings have been delivered since the formation of Molson Coors in 2005 which includes 42% of MillerCoors annualized cost savings.

The transaction provides material strategic benefits including improved market position, increased scale to drive better efficiencies, expanded global reach and full ownership control of the U.S. business. Molson Coors' presence in the U.S. market will grow to roughly two thirds of total revenue which should dampen the negative effects from foreign exchange headwinds. According to the company, Molson Coors will be the number two brewer in the U.S. with approximately 27% total market share including the number 2 and 4 brands.

However, Molson Coors has experienced declines with beer volumes in the company's key developed markets of the U.S., Canada and Europe. The past volume declines in the low single-digit range are driven by competitive pressures including the shift in consumer preferences, lackluster economic conditions, termination of certain JVs, and weak consumer spending. The demand for mainstream lager beer in the U.S., despite the economic recovery, has been negatively affected by unemployment rates for young, lower income men and as the millennial generation shifts preferences into spirits, wine and craft beers. MillerCoors' Tenth and Blake above-premium portfolio provides an important growth offset to the structural declines within the economy segment.

KEY ASSUMPTIONS

Fitch's current key assumptions assuming that the deal closes in the second half of 2016:

--Combined 2015 pro forma revenue of $11.5 billion and EBITDA of $2.4 billion.

--Pro forma leverage at acquisition close in the low-to-mid 5x range assuming mainly a debt financed deal (75-80%). This compares to approximately 2.4x for Molson Coors estimated leverage at the end of 2015.

--Leverage to improve to the low-4x range within 24 months post the closing of the transaction, due primarily to expected debt repayment from the signficant FCF generation that will continue to benefit from on-going cost reductions.

--Molson Coors would discontinue share repurchases, maintain the current dividend per share level and suspend its current dividend payout target for at least 24 months following transaction close in order to focus on debt reduction.

Fitch's key assumptions for Molson Coors on a standalone basis in 2016:

--Revenue growth at 2.5% and EBITDA margins remain stable at current levels in the 19-20% range.

--FCF of at least $275 million (calculated as cash flow from operations [CFFO] less capital expenditures, pension contributions and dividends).

--Leverage of approximately 2.4x (total debt-to-operating EBITDA plus LTM equity income), assuming no further debt reduction.

--Cash levels will reduce over the long term to $250 million-$300 million with the focus on the PACC model.

RATING SENSITIVITIES

Upon completion of the transaction, the potential exists for a downgrade of up to two notches for the ratings of Molson Coors. The final ratings will depend on actual debt/equity financing mix, pro forma leverage at close, volume and pricing trends for Molson Coors flagship brands in their largest markets (U.S., UK and Canada), macroeconomic outlook within key geographic regions, and the degree of visibility for a sustainable de-leveraging path using cash flow during the first two years post-completion.

A positive rating action is currently not expected. If the transaction does not proceed, this will likely translate into Molson Coors ratings being affirmed.

LIQUIDITY - for Molson Coors on a Standalone Basis

At Sept. 30, 2015, liquidity was $1.1 billion, comprised of $393 million in cash and $740 million availability on the $750 million revolver that matures in 2019. The credit facility supports the company's $750 million commercial paper (CP) program that had $10 million outstanding at the end of the third quarter 2015. Molson Coors' maturities during the next two years are $730 million due in 2017 including CAD500 unsecured notes and $300 million unsecured notes. Fitch expects Molson Coors to target longer-term cash balances in the range of $250 million to $300 million.

Fitch expects FCF for 2015 (calculated as CFFO less capital expenditures, pension contributions and dividends) to be approximately $40 million. In 2016, Fitch expects FCF of at least $275 million.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings for Molson Coors on Rating Watch Negative:

Molson Coors Brewing Company (Parent)

--Long-term IDR 'BBB';

--Short-term IDR 'F2';

--Commercial paper rating 'F2';

--Bank credit facility rating 'BBB';

--Senior unsecured debt rating 'BBB'.

Molson Coors International LP

--Senior guaranteed unsecured debt 'BBB'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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Contacts

Fitch Ratings
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Bill Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
or
Committee Chairperson
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
or
Committee Chairperson
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com