MOODY'S CONFRIMS Baa1 SENIOR RATING OF FOSTER'S BREWING.
New York, 03-20-98 -- Moody's Investors Service confirmed the Baa1 rating of FBG Finance Limited's senior unsecured notes which are guaranteed by its parent company, Foster's Brewing Group Ltd. The confirmation reflects Moody's expectation that Foster's will: 1) maintain its strong position in the Australian beer market; 2) use proceeds from recent asset dispositions to reduce debt; and, 3) fund future investment initiatives - including capital investments and acquisitions - in a manner that helps to maintain appropriate debt protection measures. Notwithstanding this confirmation, Moody's near-term outlook is that Foster's will be weakly positioned at the Baa1 rating level due to its considerable balance sheet leverage, and that the company will have only modest capacity to undertake debt-financed acquisitions or share repurchases. This confirmation concludes a review initiated on June 5th, 1997 following the company's announcement of a large share repurchase and a potential increase in its ownership position in Molson Breweries.
Moody's expects that Foster's will maintain its highly competitive and profitable position in the Australian beer market, which accounts for about 80% of total operating income. The company has a very competitive cost structure, a well managed portfolio of premium brands, and an increasingly efficient distribution network. These strengths have supported steady improvement in this segment's earnings and competitive position. Between 1994 and 1998 operating margins rose from 17% to 21%, and market share increased from 52% to 56%. Moreover, despite the maturity of the Australian beer market, Foster's earnings from this sector should remain relatively predictable.
Through the six months ended December 31, 1997, Foster's expended approximately A$1.0 billion on: share repurchases (A$625 million); increasing its ownership position in Molson Breweries of Canada from 40% to 50% (A$221 million); and, various acquisitions (about A$180 million). These transactions were largely funded with debt, which increased from A$1.3 billion to A$2.4 billion. However, proceeds from the completed sales of Foster's U.K. pub venture, the liquidation of its rights tied to the market price of British brewer Scottish & Newcastle, and the disposition of various other assets, should enable the company to reduce debt by about A$500 million during the near term. Nevertheless, following these transactions debt protection measures will be considerably weaker than past levels, with fixed charge coverage of about 3.5 times on a pro forma basis.
We expect that a critical component of Foster's long-term strategy will be the steady expansion of its international beer and wine operations through acquisitions and reinvestment in existing ventures. However, due to the company's moderate level of financial flexibility, it has minimal capacity to undertake debt-financed transactions at the current rating level. Consequently, we anticipate that any large investment will be funded in a manner that preserves financial flexibility at appropriate levels. Options available to Foster's to support such a transaction include further asset dispositions, the issuance of equity, or the deferral of a large transaction until its equity base has grown.
Foster's Brewing Group Limited, headquartered in Melbourne, Australia, conducts brewing operations in Australia, Canada, and China through its subsidiaries and joint ventures. FBG Finance Limited, a wholly-owned subsidiary of Foster's, is a financing company for Foster's and its controlled entities.
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