DBRS Places The Pepsi Bottling Group, Inc. Under Review

DBRS has today placed the Senior Unsecured Debt (guaranteed by PepsiCo, Inc.) and the Commercial Paper ratings of The Pepsi Bottling Group, Inc. (PBG or the Company) Under Review with Negative Implications and the Senior Unsecured Debt ratings Under Review with Developing Implications. This action follows today’s announcement by PepsiCo, Inc. (PepsiCo) that it has offered to buy all remaining un-owned shares of its two largest bottlers – PBG and PepsiAmericas, Inc. (PAS) – for total consideration of approximately $6.0 billion. Concurrently, DBRS has placed the ratings of PepsiCo Under Review with Negative Implications (see related press release).

With the potential consolidation of PBG into PepsiCo, it is likely that all of PBG’s ratings could ultimately reflect those of PepsiCo. PBG had approximately $6.2 billion in total debt outstanding at year-end, of which $2.3 billion was guaranteed by PepsiCo and carries PepsiCo’s AA (low) rating. PBG’s non-guaranteed debt is rated A (high).

As we note in our related PepsiCo press release, DBRS views the transaction positively from a business profile perspective (i.e., for the PepsiCo group). However, we note that it will result in considerable deterioration of PepsiCo’s financial profile, notwithstanding PepsiCo’s large cash balances, free cash flow-generating capacity and the prospect of improving EBITDA growth. PepsiCo’s consolidated gross debt will be slightly more than $20 billion, resulting in debt-to-EBITDA approaching 2.0 times, a level DBRS considers more in line with an A (high) rating.

DBRS’s review will focus on several factors, including, but not limited to, the structure of PepsiCo and PBG and PBG’s debt post-consolidation (e.g., potential repayment, guarantees, structural subordination, etc.); the potential operational benefits of the bottler consolidation; the impact on PepsiCo’s longer-term strategy; PepsiCo’s intentions with respect to capital expenditures; and share repurchases, acquisitions and debt reduction.

Following our review, should PepsiCo indicate the desire to continue using free cash flow for share buybacks versus debt reduction or continue with debt-financed mergers and acquisitions (M&As), it is likely that the ratings will be downgraded. For this reason, DBRS has placed PBG’s guaranteed unsecured debt rating Under Review with Negative Implications. DBRS notes that this also assumes the structure of PBG’s debt post-consolidation remains unchanged. PBG’s short-term rating has also been placed Under Review with Negative Implications given that DBRS expects PBG’s liquidity profile to become more closely linked to that of PepsiCo pending a successful consolidation. DBRS notes that a rating downgrade of PepsiCo may or may not result in a downgrade of PBG’s non-guaranteed senior unsecured debt; therefore, this rating has been placed Under Review with Developing Implications. DBRS’s treatment of the non-guaranteed debt ratings will again depend on the overall structure of PBG’s debt.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Consumer Products, which can be found on our website under Methodologies.

This is a Corporate rating.