TEXT-Fitch:SABMiller's acquisition of Kingway Neutral for 'BBB+' ratings

Thu Feb 7, 2013 4:23am EST

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Feb 07 - Fitch Ratings says that SABMiller plc's ('BBB+'/Stable) acquisition - through its 49%-owned joint venture China Resources Snow Breweries Ltd (Snow) - of the Chinese brewing assets of Kingway Brewery Holdings Ltd (Kingway) for USD864m is unlikely to affect the de-leveraging trajectory that SABMiller initiated following its December 2011 acquisition of Foster's Group for approximately USD12bn.

The size of the transaction, which the agency understands will impact SABMiller proportionately to its stake in Snow, qualifies it as bolt-on spending. As we previously anticipated (see '2013 Outlook: EMEA Alcoholic Beverages' dated 13 December 2012 at www.fitchratings.com), bolt-on M&A spending is likely to remain a feature of the industry during the year. Fitch considers as bolt-on any M&A spending that is smaller than a company's annual free cash flow and bears limited integration risks.

The contribution of Kingway to SABMiller's operating profits, even after turning around and integrating the loss-making acquired business, will not be material in the medium term. However, we expect long-term growth prospects in profits from the Chinese beer market due to the scope for growing consumer income and beer consumption leading to volume growth and a better price mix for brewers.

The agency expects that SABMiller's FCF for the year ending March 2013 (FY13) will be in a range between USD1.8bn and USD2.2bn (representing 10% to 12% of total debt post Foster's) and fully applied to debt reduction. This should allow FFO adjusted leverage to drop to or below 3.0x for FY13 (approximately 3.5x at FYE12, including Foster's cash flow contribution on an annualised basis).

Assuming a similar level of annual FCF for SABMiller in FY14 (approximately USD2.0bn), we calculate that the spending on SABMiller's proportionate part of Kingway's consideration would hardly affect projected leverage as this transaction would increase it by no more than 0.1x in FY14. Before the Kingway transaction, Fitch's expectation was initially for FYE14 leverage of approximately 2.5x - a level that is comfortably below the 3.0x considered at the top end of the band consistent with SABMiller's 'BBB+' Issuer Default Rating.

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