MOODY'S ASSIGNS (P)A2/(P)PRIME-1 PROSPECTIVE ISSUER AND SHORT TERM RATINGS TO KRAFT HOLDINGS; UPGRADES NABISCO, INC. DEBT TO A2/PRIME-1; AND CONFIRMS PHILIP MORRIS COMPANIES' A2 RATINGS.
Approximately $25 Billion of Debt Securities Affected.
New York, December 11, 2000 -- Moody's Investors Service today assigned a prospective (P)A2 issuer rating
and (P)Prime-1 short term rating to Kraft Holdings, and downgraded
existing Kraft Foods, Inc. debt from A1 to A2. Moody's
also upgraded Nabisco, Inc. debt to A2/Prime-1,
and confirmed the A2 and Prime-1 long and short term ratings for
Philip Morris Companies Inc. These actions anticipate Philip Morris'
acquisition of Nabisco Holdings Corp. and the integration of this
business into its existing Kraft food operation, as well as an initial
public offering of Kraft stock in a short period after the acquisition
closes with the proceeds applied to debt reduction. The Kraft Holdings
and Kraft Foods Inc. ratings recognize the strength of Kraft's
brand portfolio, very strong market share, product and geographic
diversity, and strong and stable cash flows. It also recognizes
the strong portfolio of cracker and biscuit brands which Nabisco will
bring, as well as the higher growth characteristics of Nabisco's
product categories. The downgrade of Kraft Foods, Inc.
debt reflects the significantly higher leverage that Kraft will have following
the Nabisco acquisition. The upgrade of Nabisco, Inc.
debt reflects its pending acquisition by Kraft, and its strategic
importance to the Kraft and Philip Morris organizations. The Philip
Morris ratings reflect the strong cash flow of its global tobacco operations,
and the stable cash flow streams which it can expect from Kraft in the
way of dividend and intercompany loan repayments. The outlook for
both the Kraft and Philip Morris ratings is stable.
Kraft Holdings prospective long term issuer rating of (P)A2
Kraft Holdings prospective short term rating of (P)Prime-1
Kraft Foods, Inc. senior unsecured rating from to A2 from
Nabisco, Inc. senior unsecured to A2 from Baa2
Nabisco, Inc. backed long term industrial revenue bonds to
A2 from Baa2
Nabisco, Inc. backed senior unsecured bank credit facility
to A2 from Baa2
Nabisco, Inc. senior unsecured medium term notes to A2 from
Nabisco, Inc. commercial paper to Prime-1 from Prime-2
Philip Morris Companies Inc. and guaranteed subsidiaries:
Senior unsecured at A2
Commercial paper at Prime-1
Philip Morris will acquire Nabisco for a purchase price of $55
per share, or approximately $15 billion in cash. Philip
Morris will also assume or refinance approximately $4 billion in
Nabisco long term debt and commercial paper. This corresponds to
a multiple of enterprise value (including assumption of debt) to FY1999
EBITDA (excluding anticipated synergies) of a very full 12.9 times.
However, the acquisition of Nabisco will provide Philip Morris with
a leadership position in the $10.1 billion US cookie and
cracker segment. Nabisco's US market shares are 37% in cookies
and 43% in crackers. Ninety percent of Nabisco's domestic
sales are in categories in which it has either the number one or number
two market position. Through Nabisco, Philip Morris will
also access one of the fastest-growing segments of the food industry:
snacks (4% a year volume growth in the last year).
After closing of the transaction, Kraft should be able to achieve
significant synergy-related cost reductions. While their
implementation is likely to lead to charges with a significant cash component,
Moody's believes that these cost reductions are achievable given that
they involve consolidation in the areas of manufacturing, logistics
and administration. Moody's also believes that Philip Morris' increased
size should provide it with benefits in its procurement from suppliers
and in its relationship with its retail clients.
Philip Morris will initially fund the Nabisco acquisition through the
issuance of over $10 billion in commercial paper, $3
billion in one-year money market note, and $3 billion
of cash on hand. As part of the acquisition, Nabisco will
become a subsidiary of Kraft Holdings, and Nabisco's current $3
billion in debt will remain outstanding. Kraft Holdings will also
owe a large intercompany loan payable to Philip Morris Companies Inc.
Philip Morris intends to undertake a partial initial public offering of
less than 20% of Kraft within a short period following the acquisition,
with proceeds used to pay down Philip Morris debt, and reduce the
intercompany loan between Kraft and Philip Morris by a like amount.
Following the IPO, Kraft will commence issuing short and long term
debt, and use the proceeds to repay intercompany debt owed to Philip
Morris Companies Inc. By doing so, Philip Morris will reallocate
public debt between Philip Morris Companies and Kraft Holdings.
The majority of Nabisco, Inc.'s long term debt will remain
outstanding. We expect Nabisco's commercial paper to be repaid
within the near term, and its bank credit facility to be cancelled.
Neither Kraft nor Philip Morris will guarantee any of the Nabisco,
Inc. debt. Nevertheless, as Nabisco, Inc.
will represent a vital element of Kraft's overall food operation,
the credit strength of the organization supporting the Nabisco,
Inc. debt is substantially identical to that supporting Kraft Holdings
debt, and thus the ratings are the same.
Kraft's pro forma debt protection measures are initially weak for an A2
credit. However, the expectation of significant reduction
in intercompany debt following the planned IPO, as well as the very
strong and stable cash flows generated by Kraft's food operations should
allow the company to restore its debt protection measures to more appropriate
levels within several years.
Philip Morris Companies Inc.'s debt protection measures (excluding
Kraft) also significantly weaken following the Nabisco transaction.
But the IPO driven debt reduction, as well as the strong sources
of cash flow that Philip Morris will receive from its global tobacco business,
as well as from Kraft in the form of dividends and intercompany loan repayments,
should allow Philip Morris Companies Inc. to reduce debt and to
improve its own debt protection measures over several years.
The assignment of Kraft Holdings' ratings and confirmation of Philip Morris'
ratings are based on the expectation that an IPO of Kraft Holdings and
a significant debt reduction will occur within a short period of time
after closing of the merger. While the food entity to be created
will feature well-known brands and attractive category growth rates,
successful realization of the public offering will be dependent on the
appetite of the financial markets several months from now. A postponement
of the IPO or lower proceeds than anticipated would result in debt protection
measures that are very weak for the current rating level and would cause
downward pressure on these ratings.
Through its acquisition of Nabisco, Philip Morris will own a minority
position in United Biscuits. As the only industry player owning
a stake in this company, Philip Morris might decide to buy out its
partners in the future. Also, in recent years, Philip
Morris has spent high amounts in share buybacks. Moody's expects
that stock repurchases are likely to remain a significant cash outlay.
Still, Moody's also believes that the maintenance of a strong credit
rating is a cornerstone of Philip Morris' financial policy, and
that management will pace its share buybacks and acquisitions in a manner
that protects debt protection measures.
Philip Morris Companies Inc., headquartered in New York,
is the world's leading cigarette manufacturer and is a major global food
Kraft Holdings, headquartered in Northfield, Illinois,
is the world's second largest processed food company.
Nabisco, Inc., Based in Parsippany, New Jersey,
is a major US producer of cookies and crackers.
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
Peter H. Abdill
Vice President - Senior Analyst
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653