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Feb 12 (The following statement was released by the rating agency)
Fitch Ratings said that Nestle's decision to buy back its shares with cash proceeds from the divestment of an 8% stake in L'Oreal (F1+) would only represent a partial pass-through of cash to shareholders, if limited to the EUR3.4bn (CHF4.1bn) L'Oreal proceeds. The agency therefore would not expect any impact on Nestle's 'AA+' Issuer Default Rating from a share buyback of this magnitude even though the company's leverage was unlikely to have reduced sufficiently in FY13 to provide headroom for share buybacks.
Nestle will announce its annual results on 13 February, which should provide us with greater insights into its credit metrics and rating headroom.
Nestle's 'AA+' rating is based on Fitch's expectation that the company will achieve and maintain a lease-adjusted net debt/EBITDAR leverage of below 1.0x as well as retaining its well-diversified portfolio of businesses by product and geography, in turn supporting its healthy cash flow and operating profit margin. Following acquisition activity which had led to an increase in leverage to 1.3x in 2012, Nestle decided not to launch a new share buy-back programme after 2011.
This, together with the prospects of improved free cash flow generation, should bring leverage back below 1.0x, a level consistent with its 'AA+' rating.
Nestle's other divestments of non-core assets (Jenny Craig, PowerBar, a 10% stake in fragrance-maker Givaudan) should further contribute to achieving the target leverage at FYE13, despite potentially slower-than-expected organic growth in 2013.
Fitch views the L'Oreal transaction as a signal of Nestle's intention to gradually divest its remaining 23.3% stake in L'Oreal over the long-term (worth EUR17.5bn at current market prices) and use the proceeds for a combination of M&A and share distributions while protecting its credit metrics. However, further sales of L'Oreal shares owned by Nestle directly to L'Oreal or to the other major L'Oreal shareholder Madame Bettencourt are unlikely as this would bring the stake of Madame Bettencourt above the threshold of 33.33% and trigger a mandatory take-over offer.