DBRS Downgrades Nestle to AA and R-1 (middle), Stable Trends, Following the Acquisition of Pfizer Nutrition

DBRS has today downgraded the long-term and commercial paper ratings of Nestle S.A. and Nestle Capital Canada Ltd. (Nestle or the Company) to AA and R-1 (middle), respectively from AA (high) and R-1 (high); the trends are Stable. This action follows the conclusion of DBRS’s review of the Company’s acquisition of Pfizer Nutrition. With this rating action the Company is removed from Under Review with Negative Implications.

On April 24, 2012, DBRS placed the ratings of Nestle Under Review with Negative Implications following the Company’s announcement that it had agreed to acquire Pfizer Nutrition for USD 11.85 billion in cash. Nestle planned to finance the transaction with cash on hand and incremental debt.

In terms of operations, the acquisition enhances Nestle’s position in global infant nutrition. Pfizer Nutrition generated sales of approximately USD 2.2 billion and EBITDA of approximately USD 500 million in 2011. Pfizer Nutrition will also provide Nestle with added exposure to high-growth markets (approximately 85% of sales come from emerging markets with large, high-growth populations). Nestle will aim to leverage Pfizer’s research and development capabilities with the goal of achieving USD 160 million in total cost synergies within three to four years of the acquisition.

In its review, DBRS focused on the magnitude and pace of Nestle’s deleveraging intentions following the acquisition, particularly within the context of the Company’s objectives for growth (organic and via further acquisitions) and cash returns to shareholders.

Despite the benefits generated by the acquisition, DBRS believes that the Company will be challenged to restore its financial profile to a level compatible with the AA (high) rating category in a reasonable time frame and to maintain such level on a go-forward basis. As a result, DBRS concluded that Nestle is best positioned in the AA rating category, with a stable trend.

At year-end 2011 (i.e., pre-acquisition), DBRS calculated Nestle’s balance-sheet debt at approximately CHF 22.3 billion, and net debt of nearly CHF 14.3 billion, as the Company cycled through the disposition of Alcon and the related distributions of cash (through dividends and share repurchases). EBITDA in 2011 was approximately CHF 16 billion, resulting in gross debt-to-EBITDA of 1.39x and net debt-to-EBITDA of 0.89x.

Pro forma the Pfizer Nutrition acquisition (i.e., post-acquisition), DBRS estimates Nestle’s net debt could increase to more than the CHF 21 billion level, with metrics peaking beyond the range acceptable for the AA (high) rating category subsequent to the acquisition, and possibly declining toward the net debt-to-EBITDA level of 1.0x only by the end of 2014. (DBRS methodology typically focuses on gross debt levels; however, DBRS gives some consideration to Nestle’s cash holdings.)

Going forward, DBRS recognizes that Nestle possesses the ability to consistently generate healthy free cash flow, which may offer the Company the opportunity to strengthen its financial profile in the medium term. That said, DBRS believes Nestle will continue to require financial flexibility in order to respond to an increasingly challenging economic environment while exploring additional growth. Given the magnitude, pace and risks associated with the Company’s deleveraging plans, DBRS believes Nestle is best positioned in the AA rating category with a Stable trend.

In terms of liquidity, DBRS methodology typically couples a long-term rating of AA with a short-term rating of R-1 (middle). The R-1 (middle) rating continues to reflect Nestle’s free cash flow generating capacity, access to commercial paper markets, committed bank lines and manageable debt maturity schedule.

Notes:
All figures are in Swiss Francs unless otherwise noted.

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