SABMiller benefiting from broader geographic diversity following its acquisition of Foster's Group, S&P says; company's exposure to developed and developing markets now more balanced
July 2, 2012
-- U.K.-incorporated international brewer SABMiller PLC benefits from broader geographic diversity following its acquisition of Australian brewer Foster's Group Ltd. (Foster's).
-- We assess that SABMiller now has a more balanced exposure to developed and developing markets. In addition, the group has confirmed its commitment to a leverage target of 2.0x-2.5x.
-- We are therefore revising the outlook on SABMiller to positive from stable and affirming our 'BBB+/A-2' long- and short-term corporate credit ratings on the group.
-- The positive outlook reflects the possibility of an upgrade if SABMiller's integration of Foster's realizes operational targets such as synergies and profitable growth.
On July 2, 2012, Standard & Poor's Ratings Services revised the outlook on U.K.-incorporated international brewer SABMiller PLC to positive from stable. At the same time, we affirmed our 'BBB+' long-term and 'A-2' short-term corporate credit ratings on the group.
The outlook revision reflects our view that SABMiller benefits from broader geographic diversity following its acquisition of Australian brewer Foster's Group Ltd. (Foster's). In addition, we assess that SABMiller's exposure to developed and developing markets is now more balanced. Furthermore, we think that Foster's is in a position to benefit from access to SABMiller's supply chain and marketing and development capabilities. SABMiller plans to increase the revenues and reduce the costs of Foster's Australian beverage unit Carlton and United Breweries, and expects to realize synergies of A$180 million per year by the fourth year after the acquisition.
We assess SABMiller's business risk profile as "strong," supported by its strong brands, its leading market shares in many of its key regions, its efficient manufacturing processes, and its geographic diversification. In the year ended March 2012, 32% of the group's reported EBITA derived from Latin America; 14% from Europe; 13% from North America; 13% from Africa; 6% from Asia Pacific; and 22% from South Africa. These numbers include Foster's results from mid-December 2011.
An upgrade depends on the success of SABMiller's integration plan for Foster's, in terms of profitable growth and the realization of synergies. It also depends on the group reaching and maintaining a Standard & Poor's-adjusted ratio of funds from operations (FFO) to debt of at least 30%. We estimate that on a pro forma basis accounting for earnings from Foster's, the group's adjusted FFO to debt was about 25% at the end of March 2012, and adjusted debt to EBITDA was about 3x.
We think that SABMiller's exposure to developing regions will help it to grow its revenues in the mid-single digits over the next few years. We believe that the group will be able to protect its margins against commodity price inflation using cost control and innovation, which should support selective price increases. We therefore project that SABMiller will be able to reduce
its adjusted leverage to between 2.5x and 3.0x and reach adjusted FFO to debt of about 30% by the end of financial 2013 (ending March 31). This projection is supported by our understanding that the group is committed to achieving and maintaining a leverage target of 2.0x-2.5x.
The 'A-2' short-term rating reflects our opinion that over the short term, SABMiller should have ample internal liquidity, good cash flow characteristics, and significant access to the capital markets. We view SABMiller's liquidity as "adequate" under our criteria, indicating that sources of cash are sufficient to cover uses of cash by at least 1.2x over the next 12 months.
We estimate that SABMiller's liquidity sources over the next 12 months comprise:
-- A balance of cash and cash equivalents of $745 million at the end of March 2012.
-- Undrawn committed credit facilities maturing in more than one year of $3 billion, $2,236 million of which mature in more than five years.
-- FFO of about $5.4 billion.
We estimate that SABMiller's liquidity uses over the next 12 months comprise:
-- Short-term debt of $1.1 billion at the end of March 2012.
-- Capital expenditure of about $1.6 billion.
-- A dividend payment of about $1.5 billion.
In addition, we consider that the following factors support SABMiller's "adequate" liquidity profile:
-- Good access to capital markets, as demonstrated by SABMiller's successful refinancing of $7 billion of the Foster's acquisition bank debt in the U.S. bond market earlier this year.
-- Significant headroom under the single covenant in the group's bank facilities.
-- The absence of downward rating triggers that would accelerate the maturity of a material amount of debt.
The positive outlook reflects the possibility of an upgrade if SABMiller's integration of Foster's realizes operational targets such as synergies and profitable growth. In addition, an upgrade depends on the group reaching and maintaining adjusted FFO to debt of at least 30%, which corresponds to adjusted debt to EBITDA of 2x-3x. An upgrade does not depend on a reduction in leverage to less than 2x. This is because of the positive effect that we assess Foster's has had on the group's business risk profile, mainly through an improvement in its geographic diversity and the balance between developed and developing markets.
We could revise the outlook to stable if adjusted FFO to debt does not increase to close to 30% by the end of March 2013. This could happen if the group increases its discretionary spending on acquisitions and paybacks to shareholders. However, we understand that SABMiller remains committed to its public leverage target of 2.0x-2.5x.