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28 Sep 1998
MOODY'S CONFIRMS Baa2 RATING OF QUAKER STATE SENIOR NOTES; ASSIGNS (P)Baa2 RATING TO THE NEW SENIOR BANK FACILITY OF PENNZOIL-QUAKER STATE
Moody's Investors Service assigned a Baa2 long term senior unsecured rating to Pennzoil-Quaker State Company ("Pennzoil-Quaker State"), the new entity to be formed from the merger of Quaker State and the motor oil and car care activity of Pennzoil. It also assigned a (P)Baa2 rating to Pennzoil-Quaker State's new $1 billion bank facility. Moody's also confirmed the Baa2 rating of the $100 million senior notes of Quaker State, which will continue as a subsidiary of Pennzoil-Quaker State. Finally it withdrew the (P)Baa2/(P)Baa3 ratings on the shelf registration of Quaker State. This concludes Moody's review for possible downgrade of Quaker State's ratings. The assignments, confirmation and cancellation assume that the merger, which is subject to receipt by the company of an I.R.S. letter ruling, occurs by the end of 1998.
The Baa2 ratings take into account the stagnant to declining demand for motor oil in the United States. However, they are also based on the expected achievement of cost reductions to be derived from the merger, the preeminent share of the new entity to be formed in the motor oil market, as well as the benefits expected from an enlargement of the product offering towards higher-margined car care products. The outlook is updated as follows:
"The rating is stable. Moody's expects the management of Pennzoil-Quaker State to pursue a strategy of diversification of its product offering towards car care products, and to follow a conservative financial policy, in particular in the financing of its acquisitions, which should lead to an improvement of debt protection measures over time."
Ratings assigned: Pennzoil-Quaker State:
Baa2 senior unsecured rating
(P)Baa2 to $1 billion revolving credit and competitive bid facility due 1999
Rating confirmed: Quaker State:
Baa2 for $100 million 6 5/8% notes due 2005
Rating withdrawn: Quaker State
(P)Baa2/(P)Baa3 for shelf registration
Motor oil, which will represent approximately half of the sales of Pennzoil-Quaker State immediately after the merger, is a product in stagnant to declining use in the United States, as improving engine technology increases the mileage interval required between oil changes. Moody's does not anticipate that this trend will reverse. However Pennzoil-Quaker State should benefit from the on-going long term shift away from the do-it-yourself market (where motor oil is purchased in traditional retail outlets) to the do-it-for-me (where motor oil is purchased as part of a service package in quick lube shops, service stations or repair garages). Pennzoil-Quaker State's market share in the do-it-for-me will be 49%. It will also be strong, but at a lower level, in the do-it-yourself, at 29%.
The company anticipates more than $100 million in cost reductions on an annual basis. Given the areas of activities in which these savings will be sought, and the level of accuracy which characterizes their determination, Moody's considers the expected level of operating income improvement as highly achievable.
Pennzoil-Quaker State will control a portfolio of car care brands with often leading market shares in their categories. These brands carry significantly higher gross margins than motor oil, and have better growth prospects. They should benefit from cross-selling opportunities with motor oil in the network of quick lube shops owned or franchised by the company. This network will be the largest in the U.S. The breadth of the portfolio offering should bring strength to the shelf and category management positions of Pennzoil-Quaker State, and should be widened over time by additional acquisitions in this sector.
The $1 billion revolving credit and competitive bid facility has a 364-day tenor, but can be converted at any time before maturity into a 1-year term loan at the company's option. The Baa2 rating on Quaker State's $100 million senior notes is based on the addition of Pennzoil-Quaker State as a co-obligor to this facility.
Quaker State Corporation is a consumer automotive products and services company. It is expected to merge with the operations of Pennzoil in the consumer automotive area to form a new company, to be called Pennzoil-Quaker State Company.
No Related Data.
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