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02 Sep 1999
MOODY'S CONFIRMS THE A2/PRIME-1 RATINGS OF ALLIED DOMECQ PLC
Moody's Investors Service has confirmed the A2/Prime-1 debt ratings of Allied Domecq Plc and its related entities following the sale of the company's UK retail businesses to Punch Taverns and Bass PLC, effective September 6, 1999. The confirmation reflects our view that, while the group will lose around a third of its trading profits and the divestment will initially weaken the group's debt protection measurements, Allied's future focus on the core spirits business will result in improved margins and debt protection measures over the intermediate term. However, the rating outlook remains negative based on Moody's expectation of increasing pricing and demand pressures throughout the global spirits industry, combined with higher levels of competition. This concludes the review of the company's ratings for possible downgrade initiated on May 10, 1999.
Allied Domecq has agreed the sale of its UK retail businesses to Punch Taverns and Bass PLC for a consideration of GBP2.75 million, including the assumption of GBP25 million of inter-company debt. The divested assets comprise 3,544 managed and leased pubs, Allied's 50% stake in First Quench (the off-licence joint venture formed last year with Whitbread Plc) and a 25% stake in Britannia Soft Drinks, the holding company for Britvic. The proceeds, a mixture of GBP1,984 million cash and equity (79 million Bass PLC shares), will all be distributed directly to Allied's existing shareholders.
While the divestment will reduce Allied's business diversity, the spirits business has produced more stable and predictable cash flows than the retail business, which has also been more susceptible to fluctuations in the domestic economy. From a purely balance sheet perspective the transaction will result in a highly leveraged company, and in spite of selling around a third of it's operations, the group's net debt levels will actually rise in the near term to around GBP1.5 billion, primarily as a result of a GBP236 million premium paid to cancel a GBP350 million 9 3/4% long-term debenture secured against the pub estate. Pro-forma net debt to EBITDA is forecast initially to rise to around 3x.
The confirmation of the ratings reflects our belief that Allied will benefit from a considerably more focused approach to managing its core spirits business, where it has a proven track record, having consistently raised operating margins in recent years. Further margin improvements are expected as the company reduces costs and focuses on driving sales volumes of its key spirits brands. Cash flow retention is likely to improve in future, helped by the company's raised dividend coverage target levels, and also, by exiting the capital intensive pub business the company's capital expenditure requirements will reduce sharply over the medium term. While Allied's debt protection measurements will be impacted initially we would expect the company's EBIT net interest coverage to revert to within with its 6-8x target level in the near term.
Moody's said that Allied is well positioned to grow its portfolio of premium international brands, reflecting an established trend within the industry whereby leading international brands have grown at the expense of local products, which do not benefit from the same levels of investment, distribution or brand equity to sustain their market share. However, the negative rating outlook reflects our expectation that the spirits industry overall will remain subject to volume and pricing pressures and that competition between the major spirits players will continue to increase.
Headquartered in London, England, Allied Domecq is a major international drinks company, which also maintains two major international food franchises, Baskin-Robbins and Dunkin' Donuts.
No Related Data.
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