TEXT-S&P keeps Alimentation Couche-Tard on watch negative
Overview -- Our 'BBB-' long-term corporate credit rating on Alimentation Couche-Tard Inc. (ACT) remains on CreditWatch with negative implications on the company's acquisition of Statoil Fuel & Retail ASA, a Scandinavian convenience store and motor fuel retailer. -- The debt-funded acquisition will increase ACT's pro forma leverage to beyond our 3.5x threshold for rating pressure, even after accounting for a recently announced equity issue. -- We will resolve the CreditWatch placement once we assess ACT's ability to reduce fully adjusted leverage to below 3x within the next 18-24 months. Rating Action On July 26, Standard & Poor's Ratings Services left its 'BBB-' long-term corporate credit rating on Alimentation Couche-Tard Inc. (ACT) on CreditWatch with negative implications, where it was placed April 19, 2012. Rationale The CreditWatch on ACT reflects the financial risk associated with its recently completed acquisition of Statoil Fuel & Retail ASA, a large Scandinavian convenience store and motor fuel retailer. On July 24, 2012, ACT announced a C$300 million equity issue to repay a portion of the US$2.7 billion of debt it incurred to fund the acquisition, although we estimate that pro forma fully adjusted leverage remains above our 3.5x threshold for downward rating pressure. We believe that leverage below 3x within 18-24 months from a combination of lower debt and earnings enhancements would be consistent with an investment-grade rating on ACT. The acquisition of Statoil strengthens ACT's business risk profile, in Standard & Poor's view, adding an established, profitable c-store and fuel retailer with a strong market position in the mature Scandinavian market. Statoil's stores have strong market shares of about 30% in Sweden, Norway, and Denmark, with good growth prospects in riskier, more fragmented eastern European markets. On the other hand, the acquisition and new markets for ACT introduce some integration risks, which might be offset by ACT's strong track record in this respect, its decentralized operating structure, as well as the retention of key Statoil personnel. In addition, Statoil has higher exposure to fuel sales, margins for which are volatile, but much higher in Scandinavia than in North America. Liquidity ACT has adequate liquidity, with cash balances of US$304 million at April 29, 2012, more than US$800 million available under existing revolving lines of credit, as well as a three-year US$3.2 billion credit facility for the acquisition of StatOil. We believe that ACT was comfortably in compliance with covenants under its financing agreements at April 29, including minimum fixed-charge coverage and maximum financial leverage tests. CreditWatch In resolving our CreditWatch, we will assess ACT's ability to reduce fully adjusted leverage to below 3x within the next 18-24 months. We expect the debt-financed acquisition increases ACT's financial risk profile, necessitating more than US$500 million of debt reduction or an offsetting amount of earnings improvements from synergies to return fully adjusted leverage to below 3.0x. The two companies' low near-term capital requirements and track records of free cash flow should enable the combined entity to reduce debt quickly after closing, although this could be hampered by higher interest costs and earnings volatility. Offsetting the risk of higher leverage is Statoil's high degree of real estate ownership, which could present some options for capital management or to bolster liquidity. ACT's industry-leading returns on capital will also weaken in the near term, but we expect the company's strong shareholder orientation to persist, with management's 23% ownership providing a strong incentive to improve returns. Related Criteria And Research -- Key Credit Factors: Business And Financial Risks In The Retail Industry, Sept. 18, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Methodology And Assumptions: Standard & Poor's Revises Key Ratios Used In Global Corporate Ratings Analysis, Dec. 28, 2011 Ratings List Ratings Remaining On CreditWatch Negative Alimentation Couche-Tard Inc. Corporate credit rating BBB-/Watch Neg/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings referenced herein 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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