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---- Original Message -----
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
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.
--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
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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