MOODY'S RATES D.E MASTER BLENDERS' ACQUISITION DEBT BA3

     (The following press release from Moody's was received by e-mail. The 
sender verified the statement.) 
---- Original Message -----
From: epi@moodys.com
To: Stephen Morris (BLOOMBERG/ NEWSROOM:)
At: May 24 2013 14:25:31   
Moody's assigns Ba3 ratings to D.E MASTER BLENDERS 1753 N.V.'s acquisition 
vehicle, OAK Leaf B.V.; stable outlook 
London, 24 May 2013 -- Moody's Investors Service has today assigned a Ba3 
corporate family rating (CFR) and a B1-PD probability of default rating 
(PDR) to OAK Leaf B.V. ("Oak"), an acquisition vehicle set up by a Joh. 
A. Benckiser-led investment group ("JAB") to acquire D.E MASTER BLENDERS 
1753 N.V. ("DEMB" or "the company"), and which will merge into DEMB 
within a reasonable timeframe following completion, leaving DEMB as the 
surviving entity. In addition, Moody's has assigned a provisional (P)Ba3 
rating and loss given default assessment of LGD3 to the EUR3.3 billion of 
senior secured debt issued by Oak. Oak's debt is guaranteed by DEMB. The 
outlook on the ratings is stable. The Baa2 rating on the EUR750 million
of senior unsecured guaranteed bank debt of D.E MASTER BLENDERS 1753 
N.V. remains unchanged at this point until successful conclusion of the 
acquisition transaction, at which time Oak's new debt package will 
refinance and replace this bank facility and Moody's will likely withdraw 
its rating. 
This action follows the announcement by JAB on 12 April 2013 that it has
made a EUR7.5 billion cash offer to acquire DEMB. DEMB's board fully 
supports and unanimously recommends the offer. To finance the 
acquisition, JAB has raised EUR3.0 billion of committed acquisition term 
debt facilities (subject to customary closing conditions) and EUR4.9 
billion of committed equity financing from its equity partners. In 
addition to the acquisition debt, JAB has secured a EUR300 million 
committed revolving credit facility. JAB's Offering Memorandum is 
expected to be published in June and the transaction remains subject to 
relevant competition clearances, amongst other things. Moody's expects 
the transaction to complete during the second half of calendar 2013. 
Moody's issues provisional ratings in advance of the final sale of 
securities and these ratings reflect Moody's preliminary credit opinion 
regarding the transaction only. Upon a conclusive review of the final 
documentation, Moody's will endeavour to assign a definitive rating to 
the senior secured acquisition debt facilities. A definitive rating may 
differ from a provisional rating. 
RATINGS RATIONALE 
--ASSIGNMENT OF Ba3 RATINGS TO DEMB's ACQUISITION VEHICLE, OAK LEAF B.V. 
"We have assigned a Ba3 Corporate Family Rating ('CFR') to OAK LEAF B.V., 
the entity set up by JAB to acquire DEMB, largely because of the negative 
impact that the leveraged acquisition has on the company's key credit 
metrics and financial flexibility, given that the acquisition is being 
financed with a significant amount of debt relative to earnings," says 
Andreas Rands, a Moody's Vice President - Senior Analyst and lead 
analyst for DEMB and Oak. "It also reflects our expectation that, going 
forward, DEMB will be used as a vehicle to consolidate the fragmented tea 
and coffee categories over time," explains Mr. Rands. "This view is based 
on JAB's press release in relation to its offer, although there are 
contractual restrictions to additional debt incurrence in this regard." 
Whilst the acquisition is not expected to close for some time, Moody's
expects it to result in DEMB's financial leverage (gross debt/EBITDA, as 
adjusted by Moody's) increasing significantly above 7.0x, assuming 
closing is near to the financial year (FY) 2012/13 (ending 30 June), from 
1.7x in FY2011/12. The increase in leverage is a result of the EUR3.0 
billion of term debt JAB has raised to finance the transaction, with the 
balance to be funded with EUR4.9 billion of common equity and preference 
shares. The company generates around EUR300 million in free cash flow per 
annum (on a Moody's adjusted basis) enabling rapid deleveraging. 
Nevertheless, Moody's expects DEMB's financial leverage to remain at or
above 6.0x for the next 12-18 months (which remains high for a Ba3 
rating), given the very high opening financial leverage position 
(assuming the transaction progresses and the company performs as 
planned). Moody's anticipates that management will be focused on 
delivering a fast de-leveraging path post-acquisition. At the same time, 
Moody's notes JAB's comments that it will use DEMB as a vehicle to 
consolidate the tea and coffee categories over time. The rating agency 
assumes that any acquisitions will be bolt-on in nature given the 
controls in the acquisition debt documentation and that JAB's primary 
focus is on deleveraging DEMB after the transaction has completed. 
Nevertheless, we understand that over the near-term JAB is targeting a 
major reduction in working capital (as a % of sales), as well as cost 
savings, to drive improved cash generation and therefore de-leveraging 
prospects of the company. We note that the senior partners of JAB bring 
significant experience of executing successful cost and working capital 
improvement programmes in prior roles and whilst at JAB. Moody's will 
monitor progress on the strategic and operating initiatives that underpin 
deleveraging prospects for the company over the next 12-36 months. 
Moody's considers that further changes to DEMB's operational structure 
could lead to 'change-fatigue' within the company, and result in elevated 
execution risk which could further challenge cost savings and process 
improvement initiatives. This is because the transaction comes soon after 
DEMB's spin-off from Sara Lee, from which the former reports that there 
was a greater-than-anticipated distraction. As a result, the speed of 
organisational change at DEMB has been slow, with a lack of clarity on 
the operational structure leading to a delay in executing key projects. 
Moody's notes that around 60% of the company's 150 senior-most employees 
have been changed in the past 24 months, with 72% of those appointments 
being external recruits. The CFO, Michel Cup, has been affiliated with 
the company for less than 18 months and a new CEO is being recruited by 
JAB. Bart Becht (senior partner at JAB) will become chairman 
post-acquisition by JAB. Notwithstanding the depth of relevant experience 
in the fast-moving consumer goods sector that the new executives bring to 
DEMB. 
Moody's further notes that DEMB recently downgraded its guidance for 
FY2012/13 sales growth and underlying EBIT margin improvement, driven by 
performance trends in H1 FY2012/13 and continued pricing pressure in 
western Europe. DEMB reports that raw material pricing is creating strong 
competitive pressure, particularly from Mondelez International (ex Kraft 
Foods) and private-label products. 
Offsetting some of these concerns is (1) the trend of premiumisation 
(single-serve products) within the coffee sector, which should help 
improve DEMB's margins over time; (2) declining green bean coffee prices; 
and (3) the company's focus on cost savings. To date, the company has 
announced EUR75 million of cost savings, mainly from IT optimisation, 
procurement and blend optimisation and organisational efficiency 
improvements. DEMB expects to save EUR25-30 million in FY2012/13 and 
reports that it achieved EUR13 million of savings in H1 2012/13. 
DEMB has a solid business profile, a result of (1) the company's
established leading position in some large coffee markets; (2) the
traction it has gained in emerging markets, particularly Brazil; and (3) 
it being able to pass on the majority of recent increases in green bean 
coffee prices (which have subsequently fallen). An additional positive 
consideration is DEMB's good liquidity profile pro-forma for the JAB 
transaction, with debt maturities for financial liabilities well spread 
and no refinancing needs over the next 12-18 months. 
The Ba3 CFR, assigned to Oak, reflects the fact that JAB's proposed 
leveraged acquisition of DEMB will weaken its credit metrics, which we 
expect to remain in deep high-yield territory for at least the next 12-18 
months. Further, the transaction comes soon after DEMB's separation from 
Sara Lee, which resulted in significant senior management changes and the 
exposure of accounting irregularities in Brazil (now resolved). DEMB also 
recently downgraded its guidance for FY2012/13 sales growth and 
underlying EBIT margin. This was driven by performance trends in H1 
FY2012/13 and continued pricing pressure in western Europe. The company's 
small scale relative to some packaged goods competitors, exposure to 
commodity price and currency volatility also weigh on the rating. 
However, more positively, the rating also reflects (1) DEMB's high 
operating margins; (2) its strong brand equities; (3) the company's good 
geographic diversity; (4) the attractiveness of the global coffee 
category in terms of its trend towards higher margin single-serve 
products; and (5) the company's high innovation capacity. In addition, 
the rating factors in JAB's strong operational experience in 
consumer-related businesses (Anheuser-Busch InBev (A3 positive), Coty, 
SAB Miller (Baa1 stable), Reckitt Benckiser (A1 stable), Labelux and 
Peets Coffee and Tea) and its rapid-deleveraging plan after the 
transaction has completed. 
--(P)Ba3 SENIOR SECURED INSTRUMENT RATINGS AND B1-PD PDR-- 
Oak's (P)Ba3 senior secured instrument ratings for JAB's acquisition debt 
are in line with the CFR. This reflects the fact that the secured 
instruments principally rely on share pledges and intellectual property 
rights for recovery purposes. Nevertheless, all proposed facilities are 
senior secured and share the same security and guarantee package. The 
guarantors account for at least 85% of DEMB group turnover and EBITDA. 
The facilities benefit from (1) a leverage covenant of 7.0x, stepping 
down to 3.5x by September 2016; and (2) an interest coverage covenant of 
2.85x, stepping up to 3.5x by December 2014. The first covenant test 
date is in December 2013 and covenants are tested quarterly thereafter.
Moody's expects that Oak will maintain ample covenant headroom on an 
ongoing basis. The company's probability of default (PDR) rating of B1-PD 
reflects the use of a 65% family recovery rate, consistent with an 
all-bank-debt capital structure. 
Moody's structural analysis assumes that DEMB's current debt will be 
repaid on completion of the JAB acquisition. This debt comprises the $650 
million of senior unsecured privately placed notes (not rated) issued 
last May through a wholly owned intermediate holding company, DE US, Inc. 
("DE US"), and the undrawn EUR750 million senior unsecured revolving 
credit facility at DEMB (the only previously rated debt instrument, rated 
Baa2). The debt instruments at DEMB and DE US, which are supported by 
cross guarantees from both issuers, are ranked pari passu. 
RATIONALE FOR STABLE OUTLOOK 
The stable outlook on the rating reflects DEMB's solid business profile 
and operating performance. It also reflects Moody's expectation that the 
company's key credit metrics will weaken considerably over the next 12-18 
months pro-forma for the JAB acquisition, but that management will be 
focused on delivering a fast de-leveraging path post-the transaction.  
WHAT COULD CHANGE THE RATING UP/DOWN 
Positive rating pressure could develop if (1) adjusted debt/EBITDA reduces 
sustainably below 5.0x; and (2) adjusted retained cash flow (RCF)/net 
debt increases above high single-digits in percentage terms, on the back 
of supportive industry conditions. 
Conversely, negative pressure could be exerted on the ratings if DEMB's 
credit metrics remained weak and post-acquisition deleveraging is 
delayed, resulting in (1) adjusted debt/EBITDA remaining above 6.0x; and 
(2) its adjusted RCF/net debt ratio remaining in the mid single digits in 
percentage terms. Although not currently expected at this time, Moody's 
could also downgrade the ratings if liquidity concerns emerged or if 
operational challenges, a large debt-financed acquisition or a more 
aggressive financial policy indicate that the company is willing to 
tolerate higher leverage levels.
 
 
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