Fitch Affirms Unilever at 'A+' on Hindustan Unilever Offer; Outlook Stable

Tue Apr 30, 2013 10:32am EDT

(The following statement was released by the rating agency) MILAN/LONDON, April 30 (Fitch) Fitch Ratings has affirmed Unilever NV's and Unilever PLC's (together Unilever) Long-term Issuer Default Ratings (IDR) and senior unsecured ratings at 'A+' and Short-term IDRs at 'F1'. The Outlook on the Long-term IDRs is Stable. Fitch has also affirmed Unilever Capital Corporation's (UCC) senior unsecured rating at 'A+' and its commercial paper programme at 'F1', as well as Alberto Culver's senior unsecured rating at 'A+' as both UCC and Alberto Culver benefit from cross-guarantees between Unilever NV and Unilever PLC. Fitch views the up to EUR4.1bn disbursement in relation to today's cash offer for a 22.5% minority stake in Unilever's 53.5% owned Indian-listed subsidiary, Hindustan Unilever, as having a limited impact on the company's solid credit metrics. The transaction improves Unilever's access to the future cash flow of this important subsidiary in a fast growing market at the expense of only moving projected leverage ratios upwards by 0.2x, which we do not view as material. Unilever continues to retain good headroom within its 'A+' rating. KEY RATING DRIVERS: Strong Organic Growth Unilever's target of doubling revenues to EUR80bn by 2020 relies mostly on organic growth. Fitch believes this is achievable subject to maintaining a pace of annual organic revenue growth of at least mid-single digit, along the lines of what the company has delivered over 2008-2012, and with balanced contribution from volume and price increases. M&A and Restructuring Unilever has been more acquisitive since 2009 but has also been divesting low-growth operations as it focuses on (mainly organic) revenue growth. Aside from the Hindustan transaction, Fitch does not factor in large M&A and has assumed in its rating case forecasts for 2014-2016 an average annual acquisition spending of EUR1.5bn net of small disposals of some lower growth assets. The continuing churn of operations and the gradual shift of focus towards emerging markets will require an evolving operational structure. Consequently, management has budgeted ongoing annual restructuring charges of 1% of sales which is reasonable in Fitch's opinion given the rationalisation efforts already made. Commitment to High Rating Fitch understands that Unilever's policy is to maintain credit ratios commensurate with a 'A+' rating. Although the group has not specified financial targets to investors, lease-adjusted net leverage has remained consistently between 1.3x and 1.7x since 2006. Fitch projects, pro-forma for the Hindustan transaction a mild increase in leverage to approximately 1.5x from 2012's 1.3x, which remains strong for the current rating. Fitch expects positive FCF in the range of EUR1.0bn to EUR1.5bn and leverage to remain steady. Fitch does not expect any major returns of capital to shareholder other than maintaining a steady dividend payout of 60%. Unilever's priority is to grow and invest in its business and therefore bolt-on acquisitions and disposals of slower growth assets remain more likely than any other shareholder-friendly initiatives. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: - Continued progress with operational restructuring or business mix so that EBIT margin is maintained at least at 14% (after restructuring costs). - Lease-adjusted net leverage sustainably between 1.0-1.3x or FFO-adjusted net leverage within 1.3x-1.5x and FFO fixed charge coverage of more than 8x. - Evidence of free cash flow in the high-end of EUR1bn-EUR2bn range - Commitment to maintaining credit ratios and financial policies consistent with a 'AA-' rating. Negative: Future developments that could lead to negative rating action include: - A change in financial policy, such as sizeable share repurchase programme or special dividend, resulting in an increase in lease-adjusted net leverage to over 2x or FFO-adjusted net leverage between 2.0x to 2.5x on a sustainable basis - Significant slowdown in growth in the emerging markets to which Unilever is mainly exposed. - FFO fixed charge cover of less than 6x - Free cash flow consistently below EUR1bn annually. Contact: Principal Analyst Ching Mei Chia Director +44 20 3530 1068 Supervisory Analyst Giulio Lombardi Senior Director +39 02 8790 87214 Fitch Italia SpA Vicolo Santa Maria alla Porta, 1 20123 Milan Committee Chair Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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