TEXT-Fitch cuts ConAgra Foods to 'BBB-/F3'
Nov 27 - Fitch Ratings has downgraded the following ratings of ConAgra Foods, Inc. (ConAgra) on the company's definitive agreement to acquire Ralcorp Holdings, Inc. (Ralcorp) for $5.1 billion equity value, or approximately $6.8 billion transaction value including assumed debt. ConAgra Foods, Inc. --Long-term Issuer Default Rating (IDR) to 'BBB-' from 'BBB'; --Senior unsecured notes to 'BBB-' from 'BBB'; --Bank credit facility to 'BBB-' from 'BBB'; --Subordinated notes to 'BB+' from 'BBB-'; --Short-term IDR to 'F3' from 'F2'; --Commercial paper to 'F3' from 'F2'. Concurrently, the ratings of Ralcorp were affirmed as follows: Ralcorp Holdings, Inc. --Long-term Issuer IDR at 'BBB-'; --Senior unsecured notes at 'BBB-'; --Bank credit facilities at 'BBB-'; --Short-term IDR at 'F3'. The definitive agreement was unanimously approved by both companies' Boards of Directors, and the transaction is expected to close by March 31, 2013, pending Ralcorp's shareholders' and regulatory approvals. The $90.00 per share agreement represents a 28.2% premium to Ralcorp's closing stock price on Nov. 26, 2012. The combined company will be one of the largest packaged food companies in North America, with net sales of approximately $18 billion. In addition to the company's significant branded food presence, ConAgra will be the largest private-label food company in the U.S., increasing ConAgra's approximately $950 million private-label sales to $4.5 billion. Revenue sources will be more balanced, consisting of 43% branded and 25% private-label packaged foods through the retail channel and 32% to the commercial/foodservice markets. ConAgra's leverage will increase substantially with this combination and this results in financial metrics that are weak for the rating category in the near term. Nonetheless, the company's commitment to de-leveraging, good liquidity, and the strength of the strategic combination support the 'BBB-' ratings. ConAgra expects to issue up to $350 million of equity and use some cash on hand. However, the transaction will be predominantly debt financed. Fitch estimates that pro forma total debt to EBITDA will initially be slightly more than 4.0 times (x), factoring in the use of a portion of ConAgra's $116.5 million cash at Aug. 26, 2012, as well as part of the cash from its September 2012 $750 million debt issuance after commercial paper repayment of roughly $300 million. Fitch has factored into the ratings ConAgra's commitment to prioritize its free cash flow (FCF) for debt reduction within 18 to 24 months after the transaction closes. Maintaining the current dividend level and very modest share repurchases should support significant debt reduction needed to retain investment grade ratings. Fitch believes ConAgra's target of approximately $225 million in annual cost savings by the fourth full fiscal year after the closing, driven by supply chain and SG&A efficiencies, will be achievable, based on similar transactions. However, Fitch believes the near-term benefit is likely to be outweighed by costs to achieve those synergies. The acquisition of Ralcorp is in line with ConAgra's strategic growth objective to increase its exposure to private label. Private label historically has grown faster than branded packaged food. The transaction has good strategic rationale as both companies operate primarily in the center of the store in complementary categories without significant overlap between branded and private-label products. ConAgra will benefit from Ralcorp's higher margin predominantly private-label portfolio. However, with both companies operating primarily in the United States, this transaction does not broaden their geographic exposure to faster growing markets. Both companies have recently been highly acquisitive, and that is also taken into consideration for the ratings. Acquisitions are not anticipated until leverage is solidly back in line with the rating level. ConAgra is expected to maintain adequate liquidity, including a portion of its cash balance, and a substantial part of its currently undrawn $1.5 billion revolving credit facility that matures Sept. 14, 2016. The credit facility provides backup to ConAgra's CP program. It contains financial maintenance covenants requiring that the fixed charge coverage ratio must exceed 1.75 to 1.0 and consolidated funded debt must not exceed 65% of the consolidated capital base. The company is expected to remain in compliance with its covenants. Upcoming long-term debt maturities are manageable. Fitch anticipates ConAgra is likely to refinance and/or use cash to pay down part of its next significant debt maturities, which are $500 million 5.875% notes due in April 2014 and $250 million 1.35% notes due Sept. 10, 2015. Fitch expects new debt for the transaction to be structured to allow significant debt reduction within two years post acquisition. What Could Trigger a Rating Action Future developments that may, individually or collectively, lead to a negative rating action include: --If ConAgra's planned debt reduction falters significantly, which could occur due to shortfalls in earnings/cash flow, such that leverage remains at or above the mid-3.0x range. Future developments that may, individually or collectively, lead to a positive rating action include: -- A positive rating action is not anticipated in the near term. Beyond this timeframe, a positive rating action could be supported by substantial and growing FCF generation, along with leverage (total debt-to-operating EBITDA) consistently in the mid-2x range. Maintenance of conservative financial policies, such as publicly stating that its financial strategies no longer include large acquisitions that require substantial debt financing, could also support an upgrade. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology