TEXT-S&P affirms Metro AG 'BBB-/A-3' ratings, outlook is stable
Overview -- We believe that Germany-based retailer Metro AG's partial sale of its Real hypermarkets has no immediate effect on its ratings. -- We are affirming our ratings on Metro at 'BBB-/A-3'. -- The stable outlook reflects our view that the company will be able to use its financial flexibility to maintain its financial risk profile in line with credit ratios we believe are commensurate with the current rating. Rating Action On Dec. 4, 2012, Standard & Poor's Ratings Services affirmed its long- and short-term corporate credit ratings on German retailer Metro AG at 'BBB-/A-3'. The outlook is stable. Rationale The affirmation reflects our view that Metro AG will be able to maintain its financial flexibility after its announcement that it will sell the Eastern European operations of its Real hypermarket subsidiary to the French retailer Groupe Auchan S.A. (A/Negative/A-1) for EUR1.1 billion. Real operates 96 stores in Russia, Poland, Romania, and Ukraine accounting for about 4% of Metro's overall sales. Real's German operations, which account for 13% of Metro's overall sales, including 12 stores in Turkey, will remain within the group and we do not expect Metro to sell the German operations in the near term for tax reasons, and the lack of investor interest. The transaction also includes the sale of ten freeholds in Russia and four in Romania to Auchan. Metro is looking for alternative uses for four stores in Romania and one in Russia that are not part of the 91 stores sold to Auchan. We expect the deal to close sometime in 2013 when the relevant anti-trust authorities give their consent. Metro's management expects the transaction to lead to a cash inflow of EUR600 million, a financial lease reduction of about EUR300 million, and a decline in Standard & Poor's operating lease debt adjustments of about EUR600 million. We believe that the likely adjusted debt reduction of EUR1.5 billion will improve Metro's ratio of funds from operations (FFO)-to-adjusted debt by 50-80 basis points (bps), but that the ratio will remain at the lower end of the 20%-25% range by Dec. 31, 2013. We assess Metro's financial risk profile as "significant," as our criteria define the term, because we believe the company retains its financial flexibility to maintain its credit ratios, despite difficulties in its operational performance (see "Metro AG Downgraded To 'BBB-' After Profit Warning; Outlook Is Stable," published on RatingsDirect on the GlobalCreditPortal on Oct. 11, 2012). We see Metro's business risk profile as "satisfactory," as the group is one of the world's largest retailers with leading market positions in European self-service wholesale retailing (Cash & Carry; C&C) and consumer electronics retailing through its MediaMarkt-Saturn MMS subsidiary. However, we believe that both these markets are undergoing fundamental changes. MMS especially will continue to be affected by price transparency and competition from online retailers. MMS online sales were only EUR158 million, or 3.3% of overall sales, in the third quarter 2012 despite the launch of Saturn.de and MediaMarkt.de in Oct. 2011 and Jan. 2012. Metro's online retailer Redcoon and some test markets alone generated EUR131 million in sales in the third quarter of 2011. We consequently believe that MMS' multi-channel strategy in Germany has so far not been able to accelerate growth in this expanding market segment. Like U.S consumer electronics retailer BestBuy (BB/Negative/--), which generated 6.1% of its domestic sales online in 2011, MMS has not yet been able to find a strategy to get paid for the service it provides for its customers and suppliers in its stores. We believe that Metro will probably generate more than 40% of its revenues in Germany in 2013. With the disposal of its U.K. C&C business in the summer, the current transaction with Real, and its revised capital expenditure schedule, we believe Metro's future profitability improvements will also need to come from its competitive home market. Liquidity The short-term credit rating is 'A-3'. We view Metro's liquidity as "adequate" under our criteria. We base our opinion on our estimate that liquidity sources will exceed funding needs by more than 1.2x in the next 12 months. As of Sept. 30, 2012, we estimated liquidity sources in excess of about EUR6.6 billion. These included: -- Surplus cash of EUR1.9 billion, excluding EUR0.15 billion which we regard as tied up in operations; -- Undrawn revolving credit facilities of about EUR3.1 billion maturing in more than 12 months, of which EUR1.5 billion mature in 2015 and EUR1 billion in 2017; and -- EUR1.6 billion of unadjusted funds from operations (FFO) that we forecast over the next 12 months. We estimate Metro's liquidity needs over the next 12 months to be about EUR3.1 billion, consisting of: -- EUR2.5 billion of short-term debt, -- EUR1.0 billion of cash relevant capex, and -- Up to EUR0.6 billion in dividends based on its historic track record. Outlook The stable outlook reflects our view that the company will be able to use its financial flexibility to maintain its financial risk profile in line with credit ratios we believe are commensurate with the current rating. We believe that Metro will be able to maintain its ratio of adjusted FFO to debt at about 20% and its ratio of debt to EBITDA ratios at about 3.5x in December 2012 and 2013. Our base-case scenario assumes that the adjusted EBITDA margin will fall by about 30 bps in the next 12 months before stabilizing, and that Metro will continue to focus on free discretionary cash flow to reduce its debt. We might consider a negative rating action if Metro's margins eroded more than we currently anticipate. This might happen if Metro did not improve Real's and its C&C business' profitability in Germany, or if MMS' margin erosions accelerated. We might also lower the ratings if Metro appeared unable keep credit ratios in line with our guidance, or if the company adopted a more shareholder-friendly financial policy. We might consider a positive rating action if Metro succeeded in turning around its currently negative business trends and improved its key financial metrics to above 25% FFO to debt and 3.0x debt to EBITDA. We consider such an outcome unlikely over the next 12 months. Related Criteria And Research -- Principles Of Credit Ratings, Feb. 16, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14,2009 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Ratings List Ratings Affirmed Metro AG Corporate Credit Rating BBB-/Stable/A-3 Senior Unsecured BBB- Commercial Paper A-3 Metro Euro-Finance B.V. Commercial Paper* A-3 Metro Finance B.V. Senior Unsecured* BBB- Metro International Finance B.V. Senior Unsecured* BBB- *Guaranteed by Metro AG 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.