DBRS Downgrades Molson Coors to BBB and R-2 (middle), Stable Trend, Following Acquisition of StarBev

DBRS has today downgraded the Senior Unsecured Debt rating of Molson Coors Brewing Company (Molson Coors or the Company) to BBB from BBB (high) and its Commercial Paper rating to R-2 (middle) from R-2 (high); the trends are Stable. This action follows the Company’s acquisition of StarBev and removes the ratings from Under Review with Negative Implications.

On April 3, 2012, DBRS placed the ratings of Molson Coors Under Review with Negative Implications following the Company’s announcement that it had entered into definitive purchase agreement with CVC Capital Partners (CVC) to acquire StarBev for proceeds of approximately $3.54 billion in cash and convertible debt. Molson Coors planned to finance the transaction with cash on hand ($500 million), incremental debt ($600 million of bank debt and $1.9 billion new issuance of senior unsecured notes) and convertible notes issued to CVC ($667 million).

In terms of operations, Molson Coors stated that it intended to operate StarBev as a separate business unit and expected operating synergies by leveraging production efficiencies, procurement, IT, and back office optimization. Specifically, the Company estimated that it could achieve pre-tax operating synergies of $50 million by 2015. Molson Coors also indicated plans to deleverage significantly in the near to medium term after the successful closing of the acquisition, but they would remain meaningfully higher than the current level.

In its review, DBRS focused its analysis on (1) the business risk profile of StarBev, including the risks associated with integration and achieving potential synergies; (2) the immediate impact of the acquisition on the financial risk profile of Molson Coors; and (3) the Company’s longer-term business strategy (including growth plans) and financial management intentions.

Despite the number of benefits the acquisition will bring, DBRS believes that Molson Coors is best positioned in the BBB rating category, with a Stable trend, based on the nature of the acquisition and its entry into a new operating region, the risks associated with integration and the realization of synergies, and the material increase in financial leverage.

DBRS ANALYSIS
(1) Business Risk Profile
The acquisition of StarBev, one of Central and Eastern Europe’s leading brewers, provides Molson Coors with strong regional brands and market positions in a less mature market than the Company’s current core markets. StarBev’s EUR 700 million in sales will also benefit Molson Coors’ overall scale and geographic diversification, while increasing the proportion of revenue generated from growth and emerging markets. That said, revenue from growth markets will still be only 14% of the consolidated company on a proforma basis. StarBev will also complement Molson Coors in terms of product offerings, providing the Company with a platform to further distribute existing brands in a new market, as well as introducing certain StarBev brands into Molson Coors core markets.

On the other hand, DBRS recognizes that a difficult macroeconomic environment in Europe could challenge growth and limit the potential realization by Molson Coors of the potential upside of the Central and Eastern European market in the near to medium term. DBRS also views the risks associated with integrating the acquisition and achieving synergy targets as considerable, as Molson Coors will attempt to retain key personnel, drive increasing efficiency, and introduce new products and processes in a new operating region. That said, Molson Coors has historically shown the ability to successfully complete joint ventures and integrate smaller acquisitions. Overall, DBRS views the impact of the acquisition on the Company’s business risk profile to be moderately positive.

(2) Financial Risk Profile
In terms of Molson Coors’ financial profile, the $3.5 billion acquisition (approximately 11x EBITDA) of StarBev results in a meaningful increase in the Company’s leverage to a level that is no longer consistent with DBRS’s previous rating. At year-end 2011 (i.e., pre-acquisition), DBRS estimates that Molson Coors had balance-sheet debt of just under $2 billion and EBITDA of approximately $1.1 billion, resulting in the key credit metric debt-to-EBITDAR of 1.77x.

Pro forma the StarBev acquisition (i.e., post-acquisition), DBRS estimates that Molson Coors will have balance-sheet debt of approximately $5.1 billion, including convertible debt issued to CVC, or nearly $4.4 billion excluding such convertible debt and EBITDA of approximately $1.4 billion, resulting in debt-to-EBITDA of approximately 3.6x (including convertible notes, or 3.2x excluding such convertible notes). The Company should nevertheless continue to generate healthy levels of free cash (at least $500 million), based on operating cash flow starting at approximately $1.1 billion, capex in the $300 million to $350 million range, and dividends of approximately $235 million.

(3) Outlook
DBRS recognizes that Molson Coors possesses the ability to deleverage at a good pace going forward, based its sound free cash flow generation. We expect the Company to use this ability to reduce financial leverage over the near to medium term. Specifically, DBRS expects debt-to-EBITDA to decline to 2.4x, not including convertible notes, from a peak of 3.2x, within 24 months of the acquisition.

The Company’s intention to deleverage, combined with the opportunity for growth and enhanced diversification, leads DBRS to believe that Molson Coors is best positioned in the BBB rating category with a Stable trend. Should the Company not deleverage to indicated levels within an acceptable time frame and/or experience weaker operating performance than expected, its credit ratings could be further pressured.

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.