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RPT-Fitch: A Post-VOD/VZW Round-Up of EMEA Corporate Cross-Holdings
September 10, 2013 / 11:27 AM / 4 years ago

RPT-Fitch: A Post-VOD/VZW Round-Up of EMEA Corporate Cross-Holdings

Sept 10 (Reuters) - (The following statement was released by the rating agency)

Following Vodafone’s long-awaited disposal of its stake in Verizon Wireless, Fitch Ratings has reviewed its EMEA corporate portfolio for the current status of similar potentially transformative shareholdings with other rated entities.

-- Transformational Stakes Unevenly Spread

The consumer and healthcare sector dominates the EMEA Fitch-rated corporate sphere for potential disposals. Nestle SA’s (Nestle), L‘Oreal SA (L‘Oreal), Casino and Novartis all hold significant stakes that, if sold, could impact their credit profiles to varying degrees. Limited disposals are expected in the natural resource and industrial sectors, while the TMT and utilities sectors are expected to see continued consolidation, evidenced by the recent deals between Vodafone and Verizon Wireless, and Nokia and Microsoft.

-- Consumer & Healthcare Names Dominate

We currently do not attribute significant credit support to Nestle’s rating for its 29.8% stake in L‘Oreal. Nestle’s stake is worth around CHF22.6bn (EUR18.3bn), and the Bettencourt family is the other main shareholder with 30.8%. A lock-up agreement signed in 2004 expires in April 2014 where after, and assuming the agreement is not extended, the pre-emption and anti-concert clauses expire and both parties could sell their stakes. L‘Oreal’s CEO has recently stated that it has sufficient resources (including a stake in Sanofi), should it want to buy out Nestle’s stake. The Bettencourt family is expected to retain their shareholding in the long-term, while we also do not expect Nestle to sell its stake without a specific use for the proceeds (e.g. M&A, share-buyback).

L‘Oreal in turn holds an 8.9% stake in Sanofi (AA-/Stable), which is valued at EUR9.4bn (no lock -up agreements). In this instance, L‘Oreal’s stake is considered a purely financial investment and it has sold Sanofi shares in the past. In November 2007, it sold a 1.8% stake for EUR1.5bn to allow it to buy YSL Beaute. The current Sanofi stake is considered moderately positive for L‘Oreal’s rating, as small stakes in Sanofi can be sold relatively quickly as demand and liquidity remains strong.

In early 2013, Casino Guichard-Perrachon SA (BBB-/Stable) acquired the remaining 50% stake in Monoprix from Galeries Lafayette and took full control. We estimate that 100% of Monoprix is worth around EUR2.4bn (including around EUR1.4bn of property assets). To minimise the acquisition price paid, Casino has entered into a “temporary holding arrangement” with bank CA-CIB, for 50% of the Monoprix shares. Upon maturity of the arrangement in Q313, CA-CIB will deliver the Monoprix shares to Casino and/or financial investors. Casino is currently searching for a long term financial investor to take 40% (up to EUR950m) while it would likely retain 10% (i.e. for a total 60% stake). The purchase of Monoprix by Casino was considered a credit positive, given its strong trading profile in austerity-affected France. A part sale would be broadly neutral provided proceeds were used to reduce debt.

Novartis (AA/Stable) holds 33% of bearer shares in Roche (AA/Stable), although we do not expect Novartis to sell the stake as the company considers it a strategic purchase. The stake provides the company with some financial flexibility and is therefore considered mildly credit positive for Novartis’ rating.

-- Automakers: More Joint Working Platforms than Joint Stakes

Fiat (BB-/Negative) currently owns 58.5% of Chrysler and has exercised two options of 3.32%, although issues remain with the owner, the VEBA fund, over pricing. We expect Fiat to buy the remaining stake it does not own and merge the two companies to eventually access Chrysler’s full cash and cash-flows, which are currently ring-fenced. We do not believe that Fiat would decide to divest its stake in Chrysler as it benefits its business profile through higher product and geographic diversification and synergies, as well as challenges in finding a suitable buyer. In addition, a disposal of their existing stake would be negative for Fiat’s current ratings.

On a smaller scale, PSA (B+/Negative) owns 57% of automotive supplier Faurecia, whose market capitalisation amounts to EUR2.2bn. The group has repeatedly confirmed its interest in keeping its stake in Faurecia, but the marked deterioration of its financial structure over the past couple of years makes a (partial) sale a possible option to generate cash in case of further cash burn.

However, we believe that PSA is likely to maintain its holding bar immediate liquidity issues - which we do not anticipate at this stage. Faurecia’s profitability is higher than PSA’s auto manufacturing operation and this holding provides a strong insight into the auto supply business as well as providing diversification benefits. The rating impact on PSA without Faurecia would be driven by the extent to which this short-term cash inflow would offset the negative impact on the business profile.

-- Gas Natural Sale May Support Repsol’s Profile

Notable opportunities in the oil and gas sector include a 30% stake in Gas Natural (worth approximately USD6bn) held by Repsol SA (BBB-/Stable), which may be reconsidered following a strategic review, as the company has said its need to hold the stake would diminish after it closes a deal to sell LNG assets to Shell. Selling the stake itself is neither positive nor negative from a ratings perspective, because Repsol would get a market based lump sum payment in place of the Gas Natural dividend stream. However, using the proceeds to pay down debt would be credit supportive.

-- TMT Driven By Consolidation

Vivendi (BBB/Stable) is undergoing a shift in strategy to focus on media-related businesses. An IPO or spin-off of SFR, the French mobile operator 100% owned by Vivendi, may be under consideration within the next two years. The rating impact of such a move would depend on the final structure of the transaction, including how debt was allocated between Vivendi and SFR.

KPN (BBB-/Stable) announced in July it plans to sell its Germany mobile business, E-Plus, to Telefonica. The transaction, which is subject to regulatory clearance, is credit positive for KPN as it strengthens the company’s balance sheet and provides it with an exit from an increasingly competitive market.

However, KPN still faces a very difficult domestic situation and an upgrade is unlikely until the company demonstrates that its competitive position in the Dutch telecoms market has improved (see “Fitch Affirms KPN at ‘BBB-'; Outlook Stable on E-plus Announcement” on 23 July 2013 at for more details).

The recent 17% sell down in RTL, leaves German media conglomerate, Bertelsmann (BBB+/Stable), with 75% (current value roughly EUR8.4bn) in Europe’s leading commercial TV broadcaster. RTL is viewed as a key credit support for Bertelsmann - by far the most cash generative business in Bertelsmann’s portfolio; in Fitch’s view it will remain strategic to management and is unlikely to be sold down further. Portugal Telecom’s (BBB-/Negative) 23.3% stake in Brazilian telecom Oi, is similarly not expected to change. The stake (proportionately consolidated by PT) is important in terms of portfolio diversification, with PT’s management heavily involved in the company’s turn-around. Fitch equally does not believe that management is either motivated or has the financial flexibility to increase its stake.

Telecom Italia (BBB-/Negative) is unlikely to be able to sell its 23% economic interest in Telecom Argentina due to the capital controls in Argentina. On a smaller scale, any sell-down of DMGT’s (BBB-/Stable) 38.7% interest in regional newspaper publisher, Local World, would not in Fitch’s view be transformational in value terms. It would though remove any residual exposure to an industry in long-term decline and much need of consolidation.

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