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Fitch Revises PepsiCo Outlook to Negative on Wimm-Bill-Dann Acquisition Announcement

^{Published on 2010-12-03 12:30:47 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed PepsiCo, Inc.'s long-term Issuer Default Rating (IDR) at 'A+' and revised the Rating Outlook to Negative from Stable after the company announced an agreement to acquire a 66% stake in Wimm-Bill-Dann OJSC (NYSE: WBD) for approximately $3.8 billion, subject to regulatory approvals.

The Negative Outlook reflects that PepsiCo's leverage is currently high for the 'A+' rating category. Furthermore, the acquisition size is larger than Fitch's expectation for a 'tuck in' acquisition. In addition, PepsiCo plans to continue to make 'tuck in' acquisitions, which Fitch believes could be financed by debt, as the Wimm-Bill-Dann acquisition is expected to use a significant portion of the company's cash balances. Additionally, there is uncertainty surrounding the timing and the level of the company's resumption of share repurchases and to what extent that they will be debt financed. The Outlook could be revised to Stable if leverage migrates back toward 1.5 times (x), which can be achieved if the company uses free cash flow to fund future share repurchases and acquisitions, as operating earnings remain strong. Debt-funded share buybacks or acquisitions which move leverage, defined as total debt-to-operating EBITDA, above 2.0x would likely result in a downgrade.

In 2009 Wimm-Bill-Dann had net revenues of approximately $2.2 billion and EBITDA of roughly $300 million. According to PepsiCo, the approximately $3.8 billion the company will pay to acquire the stake in Wimm-Bill-Dann implies a total enterprise value of approximately $5.4 billion. The transaction multiple is sizable with an implied enterprise value to EBITDA of roughly 18x. However, PepsiCo expects it can generate annualized synergies of $100 million by 2014. Given PepsiCo has a large Russian juice business, built through its $2 billion acquisition of OAO Lebedyansky in 2008, Fitch believes potential synergies are reasonable. Fitch considers this acquisition to fit well into two of PepsiCo's strategies. First, Wimm-Bill-Dann is an acquisition which gives PepsiCo scale in a developing market, ie, Russia. Second, the dairy products and juice products augment the company's nutritional focused business and its goal to grow that business from $10 billion today to $30 billion in 2020.

Fitch's ratings reflect PepsiCo's diverse food and beverage product mix, comprehensive geographic footprint, and its ability to consistently generate substantial operating cash flow. Although PepsiCo's beverage portfolio includes several leading and faster growing non-carbonated brands, the company remains the second-largest player in the U.S. carbonated soft drink (CSD) market. Consequently, the ratings consider the long-term CSD volume decline in the U.S. and other developed countries, along with CSD price-elasticity. The ratings further incorporate PepsiCo's generally shareholder-friendly position illustrated by its large dividend of nearly $3 billion for the 12 months ended Sept. 4, 2010, which has grown over 13% annually the past three fiscal years, and historically aggressive share repurchases which averaged a net $2.4 billion over the past three fiscal years.

For the 12 months ended Sept. 4, 2010, PepsiCo's total debt-to-operating EBITDA was approximately 2.1x, its operating EBITDA-to-gross interest was roughly 19.2x, and its funds from operations (FFO) adjusted leverage was estimated to be 3.5x. Including its anchor bottlers' EBITDA prior to the company's acquisition in February 2010, PepsiCo's total debt-to-EBITDA is estimated to be 1.9x. Leverage is closer to 2.0x after factoring in Wimm-Bill-Dann's EBITDA, its outstanding debt and the anticipated commercial paper (CP) funding of a portion of the acquisition.

As previously mentioned, leverage for the company is at the top end of Fitch's expectation for an 'A+' rating for an entity with PepsiCo's credit profile. Although PepsiCo will incur cash costs to restructure its bottling business, credit protection measures are likely to improve in the intermediate term with operating income growth and realization of synergies, estimated by PepsiCo to grow to $400 million annually by 2012. However, if PepsiCo utilizes the entirety of its $15 billion share repurchase authorization over three years, leverage would likely remain near the top end of Fitch's expected range, leaving the company without any room in its ratings. Ratings could also be pressured if the funding of the remaining shares of Wimm-Bill-Dann is debt financed.

As of Sept. 4, 2010, PepsiCo had ample liquidity with $5.6 billion of cash and combined capacity of approximately $5.7 billion under its 364-day and five-year revolving credit facilities and the amended revolving credit agreement assumed from The Pepsi Bottling Group, Inc. While PepsiCo will use a substantial portion of cash on hand to fund its acquisition, liquidity is expected to remain adequate. PepsiCo had approximately $3.6 billion of CP outstanding at Sept. 4, 2010. PepsiCo has a manageable maturity schedule with approximate long-term debt maturities as follows: no significant maturities remaining in 2010; $1.6 billion in 2011, $2.4 billion in 2012, $2.1 billion in 2013, and $2.7 billion in 2014. Given the company's ability to generate significant FCF, Fitch expects the company to maintain substantial liquidity. Over the past five years, the combination PepsiCo, PBG and PepsiAmericas has generated in excess of $2.7 billion of FCF annually.

Subsequent to the company's third quarter, PepsiCo guaranteed all of the senior notes of its bottling subsidiaries - Pepsi-Cola Metropolitan Bottling Company (wholly-owned by PepsiCo; PMBC) and Bottling Group, LLC (wholly-owned by PMBC). While the notes of PMBC and Bottling Group, LLC are potentially structurally superior to the notes issued by PepsiCo, Inc., Fitch has chosen not to make a distinction in the ratings at the single-A level because default risk is very low.

Fitch has affirmed the following ratings:

PepsiCo

--Long-term Issuer Default Rating (IDR) at 'A+';

--Senior unsecured debt at 'A+';

--Bank credit facilities at 'A+';

--Short-term IDR at 'F1';

--CP program at 'F1'.

PMBC

--Long-term IDR at 'A+';

--Guaranteed bank credit facilities at 'A+';

--Guaranteed senior notes at 'A+'.

Bottling Group, LLC

--Long-term IDR at 'A+';

--Guaranteed senior notes at 'A+'.

The Rating Outlook is revised to Negative.

Additional information is available at '[ www.fitchratings.com ]'. Fitch's ratings of PepsiCo and its subsidiaries are maintained as a service to the users of its ratings. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Applicable criteria are available on Fitch's website at [ www.fitchratings.com ] and specifically include:

--'Corporate Rating Methodology', dated Aug. 16, 2010;

--'Rating Packaged Food Companies', dated May 12, 2010.

Applicable Criteria and Related Research:

Rating Packaged Food Companies - Sector Credit Factors

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=526525 ]

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

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