DBRS Places Nestlé S.A. Under Review with Negative Implications

DBRS has today placed the ratings of Nestle S.A. (Nestle or the Company; rated AA (high)) and Nestle Capital Canada Ltd. (rated R-1 (high)) Under Review with Negative Implications following the Company’s announcement that it has agreed to acquire Pfizer Nutrition for US$11.85 billion, subject to approval by certain regulatory authorities. Pfizer Nutrition is a leading producer of premium nutritional products for infants and young children, with sales in more than 60 countries and manufacturing facilities in China, Ireland, Mexico, the Philippines and Singapore. The acquisition is expected to be financed through a combination of cash on hand and additional debt. The Negative Implications of the review status reflect DBRS’s concerns that the acquisition would weaken the financial risk profile of Nestle beyond levels appropriate for the current credit rating categories for an extended period of time.

Pfizer Nutrition generated sales of approximately US$2.2 billion and EBITDA of approximately US$500 million in 2011. The acquisition is expected to strengthen Nestle’s product portfolio and exposure to high-growth markets (approximately 85% of Pfizer Nutrition’s sales come from emerging markets). In addition, Nestle will aim to leverage Pfizer’s research and development (R&D) capabilities and achieve approximately US$160 million in total cost synergies within three to four years of completion.

Nestle’s current ratings benefit from the Company’s strong brands, large scale and excellent diversification. In F2011, Nestle continued to display healthy margins and profitability despite high input cost inflation and a challenging consumer environment. In terms of financial profile, Nestle completed CHF 3.7 billion of net acquisitions, CHF 5.9 billion of dividends, and CHF 5.1 billion of share repurchases, causing net debt to increase from approximately CHF 3.9 billion at year-end 2010 to CHF 14.3 billion at year-end 2011. As such, gross debt-to-EBITDA increased from 1.0 times (x) at the end of 2010 to 1.4x at the end of 2011. On a net debt basis, this metric increased from 0.2x at the end of 2010 to 0.9 times (x) at the end of 2011 – a level DBRS considers to be at the high end of the AA (high) category. With the Pfizer Nutrition acquisition, DBRS estimates that Nestle’s proforma net debt-to-EBITDA (assuming a December 31, 2012 close) would increase to the 1.25x to 1.5x range.

In its review, DBRS will focus on the Company’s intentions with regard to restoring financial leverage to a level appropriate for the AA (high) category within a reasonable time frame. This will be considered within the context of the Company’s objectives for growth (organic and via further acquisitions) and cash returns to shareholders.

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