MOODY'S ASSIGNS A1 RATING TO BOOTS BOND ISSUE
Moody's Investors Service has assigned an A1 rating to the new 300M GBP issue of The Boots Company PLC (Boots), due 2009. The rating reflects the quality of Boots business franchise, and Moody's expectation that it will continue to support a superior cash generation capacity. The rating also considers the significant level of event risk stemming from Boots' corporate strategy, as well as growing competitive pressures in Boots' core market. This is the first time that Moody's has rated long term debt of Boots. The rating outlook is stable.
Through Boots The Chemists (BTC), Boots is the leading UK retailer of health and beauty products. Thanks to a wide geographic coverage, quality high street locations, many of which have a pharmacy, and a strong product offering supported by a wide private label range, BTC has built a strong brand equity and generated high customer loyalty. BTC generates over 75% of Boots revenues, and over 80% of its operating earnings. The UK market is becoming increasingly competitive, with Superdrug, a unit of Kingfisher, stepping up its efforts to challenge BTC's market dominance, and supermarket chains increasingly targeting health and beauty as a complement to their food offering. Nevertheless, Moody's believes that BTC can maintain its market leadership, thanks to continuing investment in store development and refurbishment, product range extension, and service. BTC's high operating margins, however, are likely to come under pressure, and BTC will need to reinvest efficiency gains in marketing spending. BTC is cautiously diversifying its geographic base, with investments in Ireland, Thailand, the Netherlands and Japan. Moody's believes that BTC will continue to enter new markets. These investments provide a platform for future long term growth, but are unlikely to generate significant revenues and returns over the next several years.
Faced with slow growth in its core market, Boots has sought to broaden its revenue and earnings base, but this has not always produced significant results. Of an earlier, failed diversification in other retailing areas, which was progressively abandoned at significant losses, Boots today retains Halfords, the largest UK retailer of car parts, cycles and accessories. The company also owns Boots Opticians, a leading UK chain of opticians, which Moody's believes provides a good platform for growth in an area that offers synergies, in terms of brand extension, and real estate with BTC. Boots' diversification efforts also include Boots Healthcare International (BHI), which develops and markets consumer healthcare branded products, and Boots Contract Manufacturing (BCM), a manufacturer of private label products for BTC, BHI and third parties. BHI owns a series of strong local, and selected international OTC brands, but faces very strong global competitors. Substantial investment in building up international distribution, and product line-up should allow BHI to move into profit, but Moody's believes that returns are unlikely to match those of BHI's larger international competitors, which benefit from a wider product range to amortize their distribution costs. BCM is likely to continue to be a solid earnings contributor to Boots, but its profitability is unlikely to match that of BTC over the intermediate term, because BCM's powerful customers, including BTC, will retain the retail margin, and will continue to apply pressure on prices.
Moody's believes that in order to continue to enhance shareholder returns, Boots will continue to seek growth opportunities outside of its core market. This is likely to involve acquisitions, which could be sizeable, and are likely to be financed with the company's growing cash resources, and possibly with incremental debt. Alternatively, Boots could seek to return its excess cash to its shareholders, as it has done in three occasions over the past four years, for a total of STG 1.2 billion. Moody's said that such potential moves create a significant degree of event risk, which has been taken into consideration in the rating. The execution of these potential moves is likely to lead to an erosion of Boots currently strong financial measures, but Moody's anticipates that Boots will maintain a financial structure that is compatible with the rating.
The rating outlook is stable, reflecting Moody's expectation that Boots core business will continue to generate strong cash-flows, allowing the company to maintain a solid financial structure, despite pressures to deliver increasing shareholder returns.
Headquartered in Nottingham, England, Boots is the leading UK retailer of health and beauty products. The company had revenues of STG 5 billion for the year ended March 31, 1998.
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