Fitch assigns A rating to Sherwin-Williams' proposed offering of US$500M principal amount of senior noets due 2017, US$250M of senior notes due 2042; proceeds of notes will be used for acquisition of Consorcio Comex
December 4, 2012
– Fitch Ratings has assigned an 'A' rating to The Sherwin-Williams Company's (NYSE: SHW) proposed offering of $500 million principal amount of senior notes due 2017 and $250 million principal amount of senior notes due 2042. Proceeds from these notes issuances will be used to fund the recently announced acquisition of Consorcio Comex, S.A. de C.V. (Comex) for $2.34 billion, including assumed debt, in an all-cash transaction. SHW's ratings remain on Rating Watch Negative, where they were placed on Nov. 13, 2012, following the announcement of the acquisition. The transaction is expected to close during the first quarter of 2013.
The following ratings remain on Rating Watch Negative:
--IDR 'A'; --Revolving bank credit facilities 'A'; --Senior unsecured debt 'A'; --Short-term IDR 'F1'; --Commercial paper (CP) 'F1'.
Comex is a privately held business with operations in Latin America, the U.S. and Canada. In 2011, the company had $1.4 billion of sales, 66% of which was generated in Mexico and the remaining 34% in the U.S. and Canada. Comex manufactures and sells architectural and industrial coatings in Mexico through 3,300 points of sale operated by 750 independent concessionaires. In the U.S., Comex sells paint and coatings products under a variety of brand names through 240 company-operated paint stores. In Canada, the company markets multiple brands of paint and coatings through 78 company-operated paint stores and approximately 1,500 independent paint dealers.
The proposed acquisition has good strategic rationale for SHW. The acquisition augments its current business mix and provides the company with a meaningful, controlled distribution platform in Mexico, the western U.S. and Canada, where its store count is currently low. The acquisition also improves SHW's scale throughout Latin America and provides the company with strong brand names in that region.
While Fitch views the transaction as strategically positive for SHW, the company's long- and short-term IDRs are likely to be downgraded to 'A-' and 'F2', respectively, given the large amount of debt to be assumed in the acquisition and the resulting increase in leverage as well as integration risks associated with the transaction. Leverage as measured by debt to EBITDA will increase from 0.8x for the LTM period ending Sept. 30, 2012 to approximately 2.75x-3x at the close of the transaction. (This assumes that SHW borrows roughly $2.4 billion of debt and does not include EBITDA contribution from Comex.) Fitch expects leverage will remain at or above 2x for the 12 - 18 months following the closing of the transaction with the expectation of some debt repayment and EBITDA contribution from Comex.
Fitch expects to resolve the Rating Watch Negative upon the closing of the transaction and review of SHW's financial profile, debt reduction plans and integration strategy for the acquisition.