DBRS Confirms George Weston Limited at BBB, Trend Stable

DBRS has today confirmed the Notes & Debentures rating of George Weston Limited (Weston or the Company) at BBB, its Preferred Shares rating at Pfd-3 and its Commercial Paper rating at R-2 (high). All trends remain Stable. Weston’s ratings are based on the bakery operations of wholly owned Weston Foods and the 62.6% investment in Loblaw Companies Limited.

Weston’s ratings were confirmed and removed from Under Review with Developing Implications on March 11, 2009, after it completed the sale of its U.S. fresh bread and baked goods business to Grupo Bimbo for net proceeds of approximately US$2.5 billion. (In December 2008, Weston sold its Canadian dairy and bottling operations.) With the sale, Weston had cash and equivalents of approximately $4.9 billion (about $3.3 billion held outside Canada by wholly owned Dunedin Holdings S.A.R.L. and affiliates (Dunedin)). At that time, DBRS advised it would reassess the ratings after Weston had announced how it was going to use the cash. The Company continued with its review through 2010 and while it prefers to maintain the current ratings, some options could have rating implications. Even so, at this time, it seems unlikely the ratings would be affected.

With the sale of the U.S. fresh bakery business, Weston’s operations are about half as large, with Loblaw comprising more than 95% of the Company’s consolidated sales. Weston Canada remains the market leader in the frozen bakery segment and has a strong position in the fresh bakery market. Weston US is now left with niche markets such as frozen pies, cookies and cones. The bakery operations continue to perform well, with EBITDA margins above industry averages and positive operating cash flow.
While Weston Foods may still be investment grade on a deconsolidated basis, the current amount of debt (medium term notes: $750 million and preferred shares: $817 million) outstanding at the Weston level would likely preclude this, unless reduced with the cash on hand. As a result, the use of the cash will be a key determinant in the rating going forward. For example, the acquisition of a large, similar business could be ratings neutral, while, conversely, initiating large share buybacks or dividends without first reducing debt would put pressure on the ratings. The acquisition of the Keystone Bakery business for US$185 million is an example of the type of purchases that will help to increase the scale of the Company’s operations in the United States.

Weston’s investment in Loblaw is clearly a positive, but not the only rating factor. (There are no intercompany guarantees.) In the past, Weston’s debt rating was one or two notches below Loblaw’s rating when in the “A” range. More recently, with Loblaw’s debt rating falling into the BBB range, the differential was compressed to where the ratings are now the same. At the time, DBRS indicated that any further deterioration in Loblaw’s rating would not necessarily negatively affect Weston’s ratings. Conversely, any small increase in Loblaw’s rating would not necessarily positively affect Weston. Weston’s future Commercial Paper rating will reflect changes to liquidity at that level, including cash on hand.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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