Moody's to review TreeHouse Foods ratings for possible downgrade after TreeHouse agreed with Gryphon Investors to acquire Flagstone Foods for US$860M

Jennifer Nguyen

NEW YORK , July 2, 2014 (press release) – Moody's Investors Service ("Moody's") today placed the credit ratings of TreeHouse Foods, Inc. ("TreeHouse") under review for downgrade following the company's announcement that it has entered into an agreement with private equity firm Gryphon Investors and other shareholders to acquire Flagstone Foods, Inc. ("Flagstone") for approximately $860 million. The ratings under review include the Ba2 Corporate Family Rating ("CFR"), the Ba2-PD Probability of Default Rating ("PDR"), the Ba2 senior unsecured instrument rating and the (P)Ba2 shelf rating. Moody's affirmed the company's Speculative Grade Liquidity rating at SGL-2.

TreeHouse plans to finance the cash transaction initially through a combination of $535 million of borrowings under the company's revolving credit facility and a secondary offering of approximately $325 million worth of TreeHouse common shares. Based on these assumptions, Moody's estimates that the transaction would cause proforma debt/EBITDA, after Moody's adjustments, to rise above 4xfrom about 3.5x currently. Subject to customary closing conditions, the company plans to close the transaction in the third quarter of 2014.

RATING RATIONALE

The review for downgrade is based on Moody's concern that the proposed Flagstone acquisition could cause TreeHouse's leverage to remain above tolerable levels for the Ba2 rating category (about 3x debt/EBITDA) for an extended amount of time, and that liquidity cushion will deteriorate under the company's existing $900 million revolving credit facility. In addition, given that the $860 million acquisition of Flagstone would be the largest in TreeHouse's history, coming on the heels of the $154 million acquisition of private label food maker Protenergy Natural Foods in late May, the challenges of integrating two large acquisitions at the same time could be significant.

TreeHouse plans to use the Flagstone business as a private-label gateway from center of store staples to perimeter-located healthy snacks, following consumers' buying trends. Flagstone currently generates most of its sales through shelf-stable private label products found in the center aisles of grocery stores; however, its smaller but faster-growing perimeter business has been the key driver of Flagstone's 24% annual sales growth reported over the past three years.

"While we believe that Flagstone has demonstrated significant growth opportunities for private label snacks on the perimeter of the store, the challenge of shifting from its legacy center aisle focus appears to be a more complex strategy than TreeHouse's more straight-forward private label strategy," commented Brian Weddington, a Moody's Senior Credit Officer.

Moody's review will focus on the final terms of the transaction financing, TreeHouse's operating strategy for Flagstone, and how long it would likely take the company to restore credit metrics to pre-acquisition levels. Moody's does not anticipate that the notching of the senior unsecured notes relative to the CFR will change based on the proposed financing structure, although loss given default estimates could be subject to change depending on the final capital structure.

Moody's has taken the following rating actions on TreeHouse Foods, Inc.:

Ratings under review for downgrade:

Corporate Family Rating at Ba2;

Probability of Default Rating at Ba2-PD;

$400 million 4.875% senior unsecured notes due 2022 at Ba2, LGD4;

Senior Unsecured Shelf at (P)Ba2.

Ratings affirmed:

Speculative Grade Liquidity Rating at SGL-2.

TreeHouse Foods, Inc. is a leading private label food manufacturer servicing primarily the retail grocery and foodservice distribution channels. Its key product categories include: non-dairy powdered creamers and sweeteners; condensed, ready-to-serve and powdered soups; salad dressings and sauces; powdered drink mixes; single-serve hot beverages; specialty teas; hot and cold cereals; macaroni and cheese; skillet dinners and other value-added side dishes and salads; salsa and Mexican sauces; jams and pie fillings; pickle-related products; aseptic sauces, and liquid non-dairy creamers. Sales for the twelve months period ended March 31, 2014 were approximately $2.4 billion.

Flagstone Foods, Based in St. Paul, Minnesota, was formed by private equity firm Gryphon Investors in November 2010 through a combination of two private label food companies: Ann's House of Nuts, a trail mix and nuts company, and American Importing Co., a maker of dried fruit snacks. The company's revenues were approximately $700 million in 2013.

The principal methodology used in this rating was the Global Packaged Goods published in June 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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