Feb 15 - Fitch Ratings has placed Constellation Brands, Inc.'s (STZ)
debt ratings on Rating Watch Negative. Fitch rates the company as follows:
--Long-term IDR 'BB+';
--Secured bank credit facility 'BB+';
--Senior unsecured notes 'BB+'.
This rating action affects approximately $4.0 billion of total debt at Nov. 30,
KEY RATING DRIVERS
On Feb. 14, 2013, Constellation Brands announced in a revised agreement that it
would acquire AB InBev Piedras Negras brewery and perpetual rights to the Corona
and Modelo brands in the U.S. for $2.9 billion in addition to the remaining 50%
of Crown Imports LLC (Crown), a 50 - 50 joint venture with Grupo Modelo, it does
not own for USD 1.85 billion. The total combined purchase price will be $4.75
billion. Constellation also plans to invest approximately $400 million to expand
the Piedras Negras facility, which will then enable it to supply 100% of its
needs for the U.S. marketplace. Piedras Negras currently fulfills approximately
60% of Crown's current demand. The Crown portfolio of brands includes Corona
Extra, which according to the company is the best-selling imported beer and the
sixth best-selling beer overall in the industry, and Corona Light - the leading
imported light beer. The transaction is subject to regulatory approval from the
US and Mexico.
AB InBev and Constellation have also agreed to a three-year transition services
contract to ensure the smooth transition of what is categorize as a world class
facility. The companies claim that the Piedras Negras is a world-class brewery,
which is fully self-sufficient, utilizes top-of-the-line technology and was
built to be readily expanded to increase production capacity. Fitch believes
that there is good strategic rationale for the transaction, given the strong
cash flow generative ability of Crown, the growth of imported beer sales in the
U.S., and the strength of the Corona brand.
The Rating Watch Negative reflects that upon closing of the transaction
Constellation's leverage (defined as total debt-to-EBITDA) will increase to
about 6x, which will be high for the rating category. The company expects
leverage to decrease to its targeted range of 3 - 4x within 2 - 3 years
following the close of the transaction. Fitch estimates that total EBITDA of the
acquired operations is approximately $600 million and that free cash flow (FCF)
is in the range of $400 - $450 million. Annual combined FCF is estimated to
range between $500- $600 million for the first couple of years after allowing
for incremental CAPEX. These estimates are based on the company's disclosure and
Constellation's 50% share of Crown's cash distribution. For the LTM period
ending Nov. 30, 2012, Constellation 50% share of the Crown cash distribution was
approximately $220 million. Debt to EBITDA, including the equity income from
Crown was 4.4x for the period and EBITDA plus equity income to interest expense
was 4.1 x.
Constellation indicated that it had fully committed bridge financing in place to
complete the acquisition. Permanent financing is expected to consist of a
combination of senior notes and term loans, with the remainder of the funding
coming from the company's existing revolving credit facility, accounts
receivable securitization facility and available cash.
Future developments that may, individually or collectively, lead to a negative
rating action include:
--Should the transaction be consummated, ratings could be downgraded within the
'BB' category. Further confirmation of potential FCF generation and/or the
application of proceeds from the potential divestment of assets may limit the
magnitude of a negative rating action.
Future developments that may, individually or collectively, lead to a positive
rating action include:
--A positive rating resolution is not likely, due to the likelihood of
heightened leverage if the transaction is consummated. However beyond the
intermediate term, management's commitment to maintain leverage within their
stated goal of 3 -4x and conservatively fund a portion of future large
acquisitions with equity could result in future upward migration of ratings.
The Negative Watch could be removed and ratings maintained at current levels
with a Stable Outlook if the transaction is not consummated.
Additional information is available at 'www.fitchratings.com'.