DBRS Places Molson Coors Brewing Company Under Review with Negative Implications

DBRS has today placed the ratings of Molson Coors Brewing Company (Molson Coors or the Company) Under Review with Negative Implications following the Company’s announcement that it has signed a definitive purchase agreement with CVC Capital Partners (CVC) to acquire StarBev, a leading brewing company in Central and Eastern Europe, for $3.54 billion in cash and convertible debt. The acquisition is expected to be financed through a combination of $500 million of cash on hand, $2.5 billion of additional debt ($600 million of bank debt and $1.9 billion in new senior unsecured notes issuances) and $667 million of convertible notes as requested by and issued to CVC. The Under Review with Negative Implications status reflects the increase in financial leverage (DBRS estimates that debt-to-EBITDA will increase to approximately 3.6 times (x) including convertible notes, from 1.77x in F2011) that would result from the acquisition and DBRS’s concerns that Molson Coors’ credit risk profile would no longer be consistent with the BBB (high) rating category.

Headquartered in Prague, StarBev has a strong portfolio of over 20 brands and a regional market share of approximately 25%. StarBev currently has operations in seven countries, including Czech Republic, Serbia, Croatia, Romania, Hungary, Bulgaria and Montenegro. In F2011, StarBev generated approximately EUR 695 million in revenue and EUR 240 million in EBITDA. The acquisition is expected to provide Molson Coors with enhanced geographic diversification and meaningful exposure to growth markets, which will complement the mature nature of its current core markets. In addition, Molson Coors expects to achieve approximately $15 million of annual operational synergies by 2015, as well as the increased ability to extend their key brands into Central and Eastern Europe. In terms of free cash flow, the acquired business is expected to contribute approximately $120 million to Molson Coors in the first full year of ownership.

Molson Coors’ current ratings benefit from the Company’s strong brands in its key markets as well as its stable cash flow generating capacity. The ratings also reflect the intensely competitive nature of Molson Coors’ product offering and the mature nature of its core markets. In F2011, Molson Coors continued to display healthy margins and profitability despite high input cost inflation and a challenging consumer environment in its key markets. Strong free cash flow generated in F2011 (approximately $400 million) was used primarily to complete share repurchases of $320 million pursuant to the Company’s new share repurchase program announced during 2011. As such, debt levels remained relatively flat in F2011, resulting in a moderate improvement in the key credit metric gross debt-to-EBITDA to 1.77x from 1.84x in F2010.

In its review, DBRS will focus on (1) assessing the business risk profile of the combined entity, including the potential benefits to scale and geographic diversification, as well as the risks associated with integration and realization of synergy potential; (2) Molson Coors’ financial risk profile on a pro forma basis; and (3) the Company’s longer-term business strategy and financial management intentions. The transaction is expected to close during the second quarter of 2012, subject to approval by certain European competition authorities.

Should the transaction close in a manner substantially similar to that proposed, Molson Coors’ credit risk profile should remain investment grade despite substantially higher financial leverage. Furthermore, Molson Coors’ ratings could benefit from DBRS’s assessment of the viability of any committed deleveraging plans and result in a rating as high as BBB.

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 U.S. dollars unless otherwise noted.

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