DBRS Places Canadian Tire Credit Ratings Under Review with Negative Implications

DBRS has today placed the ratings of Canadian Tire Corporation, Limited (CTC or the Company) Under Review with Negative Implications following the Company’s announcement that it has entered into a support agreement with The Forzani Group Ltd. (FGL) to acquire all of the outstanding shares of FGL for $26.50 per share in cash.

The offer to FGL shareholders of $26.50 per share represents a 45% premium based on a ten-day volume weighted average price as of May 6, 2011. The offer is conditional upon tendering of shares representing a minimum of 66 2/3% of the outstanding FGL shares on a fully diluted basis. The transaction is also subject to relevant regulatory approvals (including Competition Bureau Canada), third-party consents and other customary conditions. CTC currently holds approximately 4% of FGL’s shares, and expects the deal to close in Q3 2011.

CTC intends to operate the FGL retail banners as a separate business unit, similar to Mark’s Work Wearhouse and Canadian Tire Financial Services. CTC expects to realize significant cost synergies by leveraging the strengths of both organizations, including supply chain, marketing and global sourcing. The Company believes it can achieve full run-rate synergies of approximately $35 million per year.

It is anticipated that the $771 million acquisition (excluding FGL debt and shares already owned by CTC) will be financed with $500 million cash on hand and short-term debt financing. The offer is not subject to a financing condition. CTC has indicated that it intends to return to pre-acquisition leverage levels within 18 to 24 months of closing the transaction.

The Negative Implications of the review status reflect DBRS’s concerns that the acquisition would heighten the business and financial risk profile of CTC beyond levels appropriate for the current credit rating categories for an extended period of time.

In its review, DBRS will focus on assessing the business risk profile of FGL, including the potential benefits to scale and diversification. In addition, DBRS will assess the risks associated with integration and realization of synergy potential within the context of an intensifying competitive environment and evolving economic/consumer circumstances. DBRS will also examine the impact of the potential acquisition on the financial risk profile of CTC, including the all-cash/debt consideration and the assumption of FGL debt and operating lease expense. Specifically, DBRS will analyze the prospective free cash flow generating capacity of the combined entity in order to determine the Company’s ability to return financial leverage to pre-acquisition levels within a reasonable time frame. DBRS will consider this in the context of the Company’s future growth plans (including organic growth and further acquisitions) for both the Retail and Financial Services segments, and its financial management intentions going forward.

DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status by the closing of the transaction.

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

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