Fitch Ratings has affirmed the ratings for Constellation Brands, Inc. (STZ) as follows, upon STZ's definitive agreement with Anheuser Busch InBev (AB InBev) to purchase the remaining 50% interest in Crown Imports LLC (Crown):
--Long-term IDR at 'BB+';
--Secured bank credit facility at 'BB+';
--Senior unsecured notes at 'BB+'.
The Rating Outlook is Stable.
This rating action affects approximately $3.4 billion of debt at May 31, 2012.
Fitch believes there is good strategic rationale for the transaction, given the importance of Crown's cash flows to Constellation's credit profile, the growth of imported beer sales in the U.S., and the strength of the Corona brand. The purchase price for the remaining 50% interest in Crown is $1.85 billion. This values the Crown distribution business at approximately 8.5x Crown's fiscal 2012 EBIT of $431 million. The transaction, subject to regulatory approval, is expected to close during the first quarter of calendar 2013. STZ has fully committed bridge financing in place for the acquisition. Permanent financing is expected to consist of a combination of revolver borrowings, a new term loan under the company's current senior credit facility and the issuance of new notes. Constellation has also agreed to purchase the Mark West wine brand for $160 million, to be financed by revolver borrowings.
Upon closing, the transaction is expected to increase debt to EBITDA to the mid-4x range when factoring in a full year of the additional Crown EBITDA. In the first quarter of fiscal 2013, Constellation completed $383 million of share repurchases under its $1 billion authorization but has suspended its share repurchases for the remainder of fiscal 2013 in order to use FCF to restore total debt-to-EBITDA back to its targeted 3-4x range within 12 months of the acquisition closing. Fitch believes Constellation can generate annual FCF in excess of $600 million post the closing of the Crown transaction, based on the estimated after-tax EBIT and the expectation of minimal additional capital requirements, and therefore views this level of deleveraging as achievable. STZ accounted for its current 50% interest in Crown under the equity method and recognized $215 million of equity earnings in Crown in fiscal 2012. Upon completion of the transaction STZ plans to consolidate the full financial results of Crown. Fitch had included equity method earnings from Crown in EBITDA since cash distributions were roughly equivalent and STZ exercises a considerable amount of control of Crown.
STZ and Crown will control the distribution, marketing and pricing for all Modelo brands in the U.S., while AB InBev will ensure continuity of supply, product quality and innovation. The new importation agreement will be perpetual and provides AB InBev with the right, but not the obligation, to exercise a call option every 10 years, subject to regulatory approval, at a multiple of 13x Crown's EBIT from the Modelo brands.
STZ's ratings and Outlook reflect the company's leading global market positions and well-known portfolio of wine, spirits and beer brands, as well as its significant free cash flow (FCF). The ratings balance the general stability of the company's operations, good operating margins and ample free cash flow generation with its acquisitive nature and near term increase in leverage.
Fitch does not anticipate upgrades to STZ's ratings in the near to intermediate term. Negative rating actions are possible if a significant and ongoing deterioration in operating results occur or the company does not reduce leverage back to the 3-4x range within 12-18 months.
The company generates a substantial amount of FCF as evidenced by its averaging over $450 million in FCF annually the past five years. Fitch believes STZ's expectation of producing between $425 million and $475 million in FCF in fiscal 2013 is very achievable. STZ has used a combination of FCF and divestitures to reduce debt to $3.4 billion from a peak of almost $5.3 billion at May 31, 2008.
STZ's North American shipment volume decreased 0.8% for the fiscal year ended Feb. 29, 2012 due to an overlap of the 2011 distributor inventory build as part of the company's U.S. distributor consolidation. Fitch anticipates wine category growth in calendar 2012 will be in the low single digits and expects STZ's volume growth to be in line with industry. Crown Imports had a good year with mid-single digit growth of depletions and domestic category depletion continuing to decline in the low single digits. Fitch forecasts 2012 U.S. beer category growth will be flat to down low single digits and expects Crown Imports volume to grow in the low single digits. Fitch believes this will translate into modest operating income growth.
STZ's liquidity remains adequate. As of May 31, 2012, the company's liquidity includes approximately $800 million of availability under its revolving credit facility due in May 2017 and $69.1 million of cash and equivalents. Maturities of long-term debt in fiscal 2013, 2014, and 2015 were $315.1 million, $314.1 million, and $599.7 million, respectively, at the fiscal year ended Feb. 29, 2012. Fitch believes the security of the credit facility, being equity in subsidiaries rather than hard assets, is relatively weak and therefore has chosen not to distinguish between the secured credit facility rating and the senior unsecured notes rating at the current rating level. STZ's capital structure does not provide an advantage structurally to any one issue. STZ is the issuer of all the company's notes outstanding and the borrower under its credit agreements for its facilities.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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