RPT-Fitch: More Consumer Firms to Follow PMI With Minority Buy-Outs

Fri May 24, 2013 5:58am EDT

May 24 (Reuters) - (The following statement was released by the rating agency)

Philip Morris International's deal to buy out a minority shareholder in its Mexican subsidiary is the sort of acquisition we expect to see repeated by other consumer goods companies over the next few years, Fitch Ratings says.

When companies make acquisitions or set up these emerging market subsidiaries, having significant minority shareholders made sense for several reasons. In some cases the parent didn't have the resources to launch the business on its own, in others it didn't want to take on the full risk and having a local partner could provide expertise that the parent company was lacking. Other countries, such as India and China, also didn't allow full ownership.

But as emerging market growth has accelerated and developed markets have slowed, these subsidiaries are becoming increasingly core businesses. Their importance will only increase further over the coming decade and companies that have the resources are therefore likely to attempt to buy out minority shareholders before valuations rise even higher. This will enable them to reap the full benefit of the subsidiary's earnings without paying dividends to minority holders.

While Philip Morris International's acquisition of the remaining 20% of Philip Morris Mexico is the result of the minority holder triggering a put option, it still fits this trend. Unilever's USD5.4bn offer to raise its stake in Hindustan Unilever is another recent example. Other companies that might consider similar deals include British American Tobacco, which has a listed subsidiary in Brazil called Souza Cruz, Diageo, whose emerging market subsidiaries include Zacapa and East African Breweries, and Anheuser-Busch InBev, which could increase its stake in Brazil's AmBev.

For Philip Morris, the acquisition will not affect its rating or adjusted leverage levels, as the exercising of the put option was already factored into our analysis. Tobacco sales volumes are still rising in emerging markets and the opportunity to move consumers on to more expensive brands and products means the outlook is much stronger than for developed markets, particularly Western Europe.

Falling consumer confidence and disposable income, particularly in Spain and Italy, hit cigarette volumes hard in 2012. The weakness means manufacturers' ability to combat falling volumes through price increases may be deteriorating.

These and other trends were highlighted in our recent "EU Tobacco Dashboard", available on www. Fitchratings.com.

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