Fitch Ratings affirms PPG Industries' Issuer Default Rating at A-, noting stable rating outlook, following company's announcement to purchase Consorcio Comex for US$2.3B
July 1, 2014
– Fitch Ratings has affirmed the ratings of PPG Industries, Inc. (NYSE: PPG), including the company's Issuer Default Rating (IDR), at 'A-', following the company's announcement that it has reached a definitive agreement to acquire Consorcio Comex, S.A. de C.V. (Comex) for $2.3 billion. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The rating affirmation reflects a geographically well-balanced company with a heightened focus on its coatings businesses, leading market positions in all of its coatings end-markets, consistent robust earnings, and excellent free cash flow (FCF) generation. Risk factors include the cyclicality of most of PPG's end-markets, aggressive growth strategy and the company's exposure to asbestos litigation.
The rating affirmation also incorporates Fitch's expectation that PPG's credit metrics will remain relatively stable following the acquisition. PPG plans to fund the acquisition primarily using currently held cash and short-term investments ($3 billion as of March 31, 2014), although the company may fund a portion of the purchase price through the addition of some debt. Fitch projects PPG's leverage as measured by debt to EBITDA will settle between 1.5x to 1.75x at year-end 2014 (assuming the transaction closes during the fourth quarter of 2014 with no EBITDA contribution from Comex) compared with 1.4x at the conclusion of 2013.
The Stable Outlook reflects PPG's strong liquidity position, management's consistent and disciplined capital allocation strategy, and Fitch's expectation of a moderate improvement in most of PPG's end markets in 2014.
COMEX ACQUISITION AND RATIONALE
Founded in 1952, Comex is a privately held architectural and industrial coatings company headquartered in Mexico City, Mexico. The company manufactures coatings and related products in Mexico and sells them in Mexico and Central America through approximately 3,600 stores that are independently owned and operated by more than 700 concessionaires (independent dealers). Comex also sells its products through regional retailers, wholesalers and direct sales customers. The company has approximately 3,900 employees, eight manufacturing facilities and six distribution centers, and had sales of approximately $1 billion in 2013.
Fitch views this transaction as strategically positive for PPG. The acquisition adds a leading architectural coatings business in Mexico and Central America, a region where PPG has limited architectural coatings presence. Additionally, the Comex operation expands PPG's industrial coatings business in the region. The proposed acquisition is also consistent with PPG's stated strategy of expanding its global coatings business portfolio.
Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less cyclical growth, and lower capital intensity. The acquisition of SigmaKalon in 2008, the divestiture of the commodity chemicals business in early 2013, the acquisition of the North American architectural coatings business of Akzo Nobel N.V. Amsterdam in April 2013, the divestiture of its 51% interest in the Transitions Optical joint venture to Essilor International and the proposed acquisition of Comex further reflect PPG's transformation into primarily a coatings company.
SOLID LIQUIDITY AND FREE CASH FLOW GENERATION
As of March 31, 2014, the company had $2.56 billion of unrestricted cash, $480 million of short-term investments and no borrowings under its $1.2 billion revolving credit facility. While PPG has sufficient cash and short-term investments to fund the Comex acquisition, management indicated that it may fund part of the purchase price with debt.
Fitch believes that the company will continue to have sufficient liquidity following the completion of the Comex acquisition to meet financial obligations, including Eur300 million of notes maturing in mid-2015 as well as obligations under its Asbestos litigation, should the settlement become effective.
PPG also generates strong FCF. For the latest-12-month (LTM) period ending March 31, 2014, the company generated $1.07 billion of FCF, compared with $841 million during 2013, $1.02 billion during 2012 and $691 million during 2011. Fitch expects FCF will represent approximately 4%-5% of sales in 2014 and 2015.
DISCIPLINED CAPITAL ALLOCATION STRATEGY
The company has been consistent in prioritizing the use of its cash and FCF, with the goal of strengthening its core businesses and providing benefits to its shareholders. At times, the company has been aggressive in repurchasing stock, particularly when the company did not find suitable acquisition opportunities. However, in the past, PPG has shown discipline in pulling back on share repurchases following a sizeable acquisition in an effort to reduce debt.
In April 2014, PPG announced a 10% increase in quarterly dividend payments effective in June 2014. In October 2011, the board authorized a repurchase program under which the company has repurchased 8.9 million shares totalling roughly $1.4 billion. Approximately $200 million remained under this program as of March 31, 2014. In April 2014, the company's board authorized a new $2 billion share repurchase program. Fitch believes that the company has the ability to fund moderate share repurchases without straining its liquidity position.
Leverage at the end of the March 2014 quarter was 1.4x, flat from year-end 2013. EBITDA-to-interest was 12.1 for the March 31, 2014 LTM period compared with 11.5x during 2013.
Fitch expects leverage will increase slightly at the end of 2014 but will remain appropriate for the current rating. Fitch projects leverage will settle between 1.5x - 1.75x at year-end 2014, depending on the amount of debt issued for the acquisition. This forecast assumes no EBITDA contribution from the Comex acquisition. Fitch projects PPG leverage will be at or below 1.5x at the end of 2015, and that interest coverage will remain above 12x during 2014 and 2015.
Future ratings and Outlooks will be influenced by broad end-market trends, as well as company-specific activity, particularly FCF trends and uses, and liquidity position.
While Fitch does not currently anticipate a positive rating action in the next 12-18 months, one may be considered if the company's credit metrics improve meaningfully from current levels, including leverage consistently in the 1x-1.5x range; interest coverage steadily above 15x; and if PPG maintains a high cash balance until its asbestos liabilities are settled.
Negative rating actions could occur if the recovery in PPG's various end markets dissipates and affects volumes, and/or sustained materials and energy cost pressures contract margins, leading to weaker than expected financial results and credit metrics, including: pro forma revenue decline of 10%; EBITDA margins falling to between 11%-12%, and leverage levels consistently above 2x. Additionally, Fitch may also consider a negative rating action if management takes on another sizeable acquisition and/or undertakes a meaningful share repurchase program funded by debt, resulting in consistent debt-to-EBITDA levels above 2x.
Fitch has affirmed the following ratings for PPG with a Stable Outlook:
--Long-term IDR at 'A-';
--Senior unsecured debt at 'A-';
--Unsecured revolving credit facility at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Robert Rulla, CPA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Sandro Scenga, New York, +1 212-908-0278
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