TEXT-S&P summary: PPR S.A.
PPR's strategy is to selectively widen its portfolio by acquiring new brands, notably in the lifestyle segment. We believe, however, that the group would probably finance an acquisition with proceeds from the sale of its mail-order division Redcats, expected this year. Even if PPR did not sell Redcats, we believe that a EUR1 billion acquisition would not endanger the group's credit profile. We continue to view the group's financial risk profile as "significant," as our criteria define the term, given its acquisitive strategy, albeit financed through disposals, and its holding company Artemis' (not rated) high level of debt. We believe that PPR could not easily issue equity to fund a sizable acquisition.
We view PPR's business risk profile as "strong," supported by its leading and wide-ranging positions in luxury goods, nonfood retail, and sport and lifestyle goods through its 80%-owned Puma brand. We consider the group's luxury goods division to be its most solid, thanks to strong brand recognition, wide geographic coverage, and its Gucci brand's high profitability, good resilience during the recession in 2009, and strong growth in the last two years. The group's other retail brands are facing less favorable business trends because they focus on mature markets where customers may continue reducing their discretionary spending. Puma is an international brand with strong worldwide recognition, but it's exposed to changing consumer preferences in a very competitive, marketing-intensive industry.
S&P base-case operating scenario
We expect PPR to show high-single-digit revenue growth in the next 12 months, as we believe the still-dynamic luxury goods market will more than offset uncertainties at Puma and book and music retailer Fnac. While we believe Fnac's margins are likely to continue declining in 2012, our anticipation is for at least maintenance of PPR's overall EBITDA margin driven by the luxury division, which offers strong pricing power.
S&P base-case cash flow and capital-structure scenario
We estimate under our base-case scenario that the group will post Standard & Poor's-adjusted funds from operations (FFO) to net debt in the 30% to 35% range for the next 24 months, owing to still-solid cash flow generation. We also expect Artemis, the holding company that owns 40.6% of PPR's share capital and 55.1% of its voting rights, to maintain its current financial policy. We expect PPR's Standard & Poor's-adjusted net debt-to-EBITDA ratio to remain in the 2.5x region in 2012, assuming small bolt-on acquisitions, and bigger acquisitions only if Redcats is sold. Even if PPR did not sell Redcats, we believe that a EUR1 billion acquisition would not significantly affect the group's credit metrics.
We view PPR's liquidity as "adequate," under our criteria, with a ratio of liquidity uses to sources above 1.5x on average for the next 24 months. The group's liquidity position is in the upper range for our "adequate" qualifier.
We estimate the following liquidity uses for the next 12 months:
-- EUR1,856 million in short-term debt;
-- EUR216 million in working capital requirements;
-- EUR400 million in capital expenditures (capex);
-- EUR450 million in dividends; and
-- A EUR250million acquisition envelope.
We estimate the following liquidity sources for the next 12 months:
-- EUR1,270 million in cash and equivalents;
-- EUR3,860 million available under committed credit facilities; and
-- EUR1,450 million of FFO.
We also acknowledge the group's headroom under its bank facilities' covenant, which stipulates that its solvency net debt-to-EBITDA ratio, calculated annually on a pro forma basis at the end of the year, must not exceed 3.75x. The ratio was below 2.0x at the end of 2011.
The stable outlook reflects our expectation that PPR will continue to perform solidly over the next 24 months on the back of robust growth prospects in the luxury goods industry, which will offset slower growth trends in the sport and lifestyle division. We estimate under our base-case scenario that PPR will keep Standard & Poor's-adjusted FFO to debt in the 30% to 35% range, and net debt to EBITDA below 3.0x despite increased capital expenditures.
The outlook also factors in our expectation that the group will continue its selective acquisitive strategy only if it manages to sell certain assets, notably Redcats. That said, we believe a EUR1 billion acquisition without any disposal would not affect the group's credit profile to a great extent, given its ability to generate substantial discretionary cash flow, which is an important rating factor. We also expect Artemis to continue to run a nonaggressive financial policy with regard to PPR's distribution.
Related Criteria And Research
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011