TEXT-S&P affirms Constellation Brands at 'BB+'
Overview -- U.S.-based Constellation Brands Inc. announced that it has signed a definitive agreement with Anheuser-Busch InBev N.V./S.A. to purchase the remaining 50% interest in Crown Imports LLC for $1.85 billion (representing about an 8.5x multiple of 50% of Crown's EBIT). -- We are affirming our 'BB+' corporate credit and senior unsecured debt ratings on Constellation Brands. -- The stable outlook reflects our expectation that management is committed to credit quality. We believe the restoration of the company's financial profile and return to credit metrics closer to current levels will remain a higher priority than funding additional growth investments or shareholder friendly initiatives. Rating Action On June 29, 2012, Standard & Poor's Rating Services affirmed its 'BB+' corporate credit and senior unsecured debt ratings on Constellation Brands. The outlook is stable. Rationale The rating affirmation follows Victor, N.Y.-based Constellation Brands' announcement that it has signed a definitive agreement with Anheuser-Busch InBev (ABI) to purchase the remaining 50% interest in Crown Imports LLC for $1.85 billion (representing about 8.5x multiple of 50% of Crown's EBIT) when ABI completes its proposed acquisition of Grupo Modelo S.A.B. de C.V. Constellation Brands currently owns 50% of Crown, a 50-50 joint venture with Grupo Modelo. Crown, is a leading marketer of imported beer in the U.S., primarily Modelo beer brands. Constellation Brands has disclosed it has fully committed bridge financing in place to complete this transaction, but expects permanent financing to consist of a combination of revolver borrowings, a new term loan under its current senior credit facility (unrated), and the issuance of senior notes. Constellation Brands expects to complete the transaction, subject to regulatory approval, during the first quarter of calendar 2013. In addition, the company announced it is purchasing Mark West, a California pinot noir brand. Constellation Brands expects this acquisition to close in July. While we believe the transactions will strengthen Constellation Brands' position as the largest multicategory supplier of beverage alcohol in the U.S., almost doubling its reported sales base, the company will finance the Crown transaction with debt. We estimate that pro forma for both transactions, fiscal year-to-date share repurchase activity, and recent debt refinancing, key credit ratios (including our standard adjustments) will weaken from fiscal 2012 year-end levels. Specifically, we believe the ratio of total debt to EBITDA will be about 4.6x, increasing from 3.9x for the year ended Feb. 28, 2012; and the ratio of funds from operations (FFO) to total debt will be about 14%, down from about 19.5%, for the same period. We consider leverage (as measured by total debt to EBITDA) of 3x-4x and FFO-to-total debt of 20%-30% consistent with a "significant" financial risk profile--but expect these credit measures to be closer to the weaker end of the respective ranges within one year of completing the Crown acquisition. We do not anticipate that Constellation Brands will engage in additional acquisitions or share repurchases in the near-term, but expect the company will apply discretionary cash flows to repay debt in order to strengthen its financial profile. Our assessment of Constellation Brands' business risk profile, including 100% of Crown, remains "satisfactory." Key credit factors in our business risk assessment include the company's portfolio of well-known beverage alcohol brands and historically strong cash generation in the highly competitive beverage alcohol markets, yet relatively narrow geographic focus. According to Constellation Brands, it is the world's leading premium wine company, with leading positions within its primary markets of the U.S. and Canada, which are highly competitive and fragmented. In fiscal 2012, wine accounted for a significant portion of Constellation Brands' sales. Its wine portfolio is complemented by select premium spirits brands and other select beverage alcohol products, including imported beer through its Crown joint venture. According to Beer Marketer's Insights, during 2011, overall beer shipments declined 1.5% in the U.S., yet imported beer shipments increased by 2.7%. We estimate that pro forma for Constellation Brands' acquisition of the remaining 50% interest in Crown, the company's current concentration in wine will decline and represent about half of its sales going forward. However, geographical diversification remains limited, and we expect sales to remain largely in the U.S. after the Crown acquisition. Since the company does not expect the Crown transaction to be completed until the first calendar quarter of 2013, our fiscal 2013 forecast remains largely unchanged, except we now do not anticipate that Constellation Brands will engage in additional acquisitions or share repurchases in the near-term, but expect that the company will apply discretionarycash flows to debt to strengthen its financial profile prior to the acquisition. Other forecast assumptions for fiscal 2013 include: -- Approximately $383 million share repurchases already made in the first quarter of fiscal 2013, yet no further share buybacks this year; -- Net sales growth in the low-single-digit percentage area; -- Operating margins will be somewhat pressured compared with fiscal 2011 due to planned brand-building and investments; -- A tax rate in line with the standard U.S. corporate tax rate of 35%; -- Cash dividends from its Crown joint venture near current levels of about $230 million; and -- Higher interest expense as a result of its recent refinancing transactions and committed bridge financing. We expect leverage will be about 3.6x and FFO-to-debt about 18% at fiscal year-end and prior to the close of the acquisition. FFO-to-total debt in the high-teens percentage area is more consistent with the indicative financial ratio range of 12% to 20% for an "aggressive" financial profile and is likely a result of Constellation Brands' geographic concentration in the U.S. (which has a higher corporate tax rates than most other countries). Liquidity We believe Constellation Brands' liquidity will remain "adequate" (as described in our criteria) and estimate that sources of cash will continue to exceed uses for the next 12 months. Our view incorporates the following assumptions: -- We expect liquidity sources (including cash, discretionary cash flow, and availability under its $850 million revolving credit facility for general corporate purposes) to exceed uses by 1.2x or more over the next 12 months. -- We expect liquidity sources to continue to exceed uses, even if EBITDA were to decline by 15%. -- We believe Constellation Brands has solid relationships with its banks and a generally satisfactory standing in the credit markets. It is our opinion that the company's relatively stable cash flow characteristics will continue, despite a very competitive operating environment and some seasonal working capital needs. Peak borrowing on the revolving credit facility generally occurs one or two months after the crush season has ended. In the U.S. and Canada, the annual grape crush normally begins in August and runs through October. In New Zealand, the annual grape crush normally begins in February and runs through May. The company generally begins taking delivery of grapes at the beginning of the crush season, with the majority of payments beginning to come due within 90 days. However, including Crown, we expect seasonal peak borrowing needs to lessen, because beer sales are typically highest during the first and second quarters of the company's fiscal year (which correspond to the spring and summer periods in the U.S.). Recovery analysis The issue-level rating on Constellation Brands' senior unsecured notes is 'BB+', the same as the corporate credit rating. The recovery rating is '3', indicating our expectation for meaningful (50% to 70%) recovery in the event of a payment default. For the complete recovery analysis, please see the recovery report on Constellation Brands Inc., published May 30, 2012, on RatingsDirect. Outlook The outlook on Constellation Brands is stable. We expect Constellation Brands to maintain its financial performance despite lingering weak macroeconomic conditions. While we expect pro forma credit measures will be weak for a "significant" financial profile following the Crown acquisition, we believe the company will forego shareholder-friendly initiatives in the near-to-intermediate term and apply discretionary cash flows to debt in order to strengthen credit ratios within one year of closing of the Crown transaction. This will include reducing and sustaining leverage close to 4x and FFO-to-debt in the high-teens percentage area. However, should operating performance weaken or if the company is unable to improve its leverage to 4x within one year of closing the Crown acquisition, we could revise the outlook to negative or consider a lower rating. Although unlikely in the next year, we could upgrade the company if it demonstrates a track record of moderate financial policies and further strengthens its credit measures, including leverage approaching and sustained near 3x and funds from operations to total debt remaining above 20%. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings affirmed Constellation Brands Inc. Corporate credit rating BB+/Stable/-- Senior unsecured notes BB+ Recovery rating 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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