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27 Nov 1997
MOODY'S DOWNGRADES GUINNESS RATINGS TO A1, UPGRADES GRAND MET RATINGS TO A1 AS THEY MERGE TO FORM DIAGEO PLC
London, 11-27-97 -- Moody's Investors' Service upgraded the senior unsecured debt of Grand Metropolitan PLC (GrandMet) and its subsidiaries from A2 to A1, its subordinated debt from A3 to A2, and its preferred debt from "a2" to "a1". At the same time, Moody's downgraded Guinness PLC's senior unsecured debt from Aa3 to A1, and its subordinated debt from A1 to A2. These rating actions were taken in anticipation of the planned merger of GrandMet and Guinness to form Diageo plc, and conclude a review initiated on 12th May 1997 when the proposed merger was announced. The merger underlying the new ratings is contingent on US Federal Trade Commission approval which Moody's expects to be achieved without ratings-significant conditions being imposed. The short term ratings of the two companies were not placed under review.
The ratings amended are as follows:
Guinness PLC: senior unsecured debt - downgraded from Aa3 to A1.
subordinated debt - downgraded from A1 to A2.
Guinness Finance BV: guaranteed senior unsecured debt - downgraded from Aa3 to A1.
guaranteed subordinated debt - downgraded from A1 to A2.
Guinness Finance Australia Ltd: guaranteed senior unsecured debt - downgraded from Aa3 to A1.
Grand Metropolitan PLC: senior unsecured debt - upgraded from A2 to A1; preferred, senior, and subordinated shelf registration - upgraded from (P)"a2" to (P)"a1", from (P) A2 to (P) A1, and from (P) A3 to (P) A2 respectively.
Grand Metropolitan Finance France S.A: guaranteed euro medium-term notes - upgraded from A2 to A1.
Grand Metropolitan Finance plc: guaranteed senior unsecured - upgraded from A2 to A1, euro medium-term notes - upgraded from A2 to A1.
Grand Metropolitan Capital Corp., Inc.: guaranteed medium-term notes - upgraded from A2 to A1, subordinated shelf registration - upgraded from (P) A3 to (P) A2.
Grand Metropolitan Int. Finance B.V.: guaranteed euro medium-term notes - upgraded from A2 to A1; subordinated shelf registration - upgraded from (P) A3 to (P) A2.
Grand Metropolitan Investment Corp.: guaranteed senior debt - upgraded from A2 to A1; shelf registration of senior debt - upgraded from (P) A2 to (P) A1, and subordinated debt - upgraded from (P) A3 to (P) A2.
Grand Metropolitan Delaware, L.P.: guaranteed preferred stock (upgraded from "a2" to "a1".
Pet Inc: guaranteed senior notes - upgraded from A2 to A1.
Moody's said the A1 long term and Prime-1 short term ratings of Diageo plc are based on the size and market positions of the merged entity, its prospective ability to generate high levels of cash flow, its improved marketing and growth opportunities as one entity and cost savings from the merger. At the same time the ratings reflect the significant debt burden Diageo will initially carry following the substantial proposed pay-out to shareholders and its relatively modest near-term interest coverage. The rating assumes that Diageo will focus on consolidation, internal growth and debt reduction over the next several years, Moody's added.
Diageo plc, which is expected to be formed in December 1997, will be a powerful force in the international branded food and drinks markets with pro forma sales of over œ13 billion and operating cash flow of some œ2 billion. While the merger will provide some cost saving synergies, particularly as regards the drinks business and overall central costs, the more significant aspect to the merger is in terms of marketing and growth opportunities. In the spirits sector, Diageo will control the leading Scotch, vodka and gin brands. The two companies have both complementary products and geographic diversification. Guinness has a stronger position in Asia, GrandMet in North America and Eastern Europe: Diageo will, consequently, be able to sell a wider range of products to a broader market. The result is likely to be more rapid growth for Diageo in both established and emerging markets than either of the merger participants would achieve individually. GrandMet's food businesses have performed strongly over recent years. Moody's expects growth in existing markets and global expansion for both Pillsbury and Burger King. Guinness Brewing Worldwide is achieving overall international volume growth, although market conditions remain mixed.
The merger unites Guinness, which has been characterised by low debt and strong cash flow to debt measurements, with GrandMet which has been burdened by considerable, albeit falling, debt since the acquisition of Pet Inc in 1995. The strong credit characteristics of Guinness will be diluted by the merger with the financially weaker GrandMet. Moreover, the proposed œ2.8 billion payment to shareholders will further dampen Diageo's debt protection measurements. However, Moody's believes that Diageo's existence will commence with a period of consolidation during which it will seek to exploit potential internal development opportunities rather than embark on acquisition-driven growth which is fundamentally at odds with its stated focus on shareholder value. The expected stability and enhanced post-merger cash flow should, in Moody's view, allow debt reduction and improvements in debt protection over the intermediate term.
While the proposed merger still requires clearance from the US authorities, Moody's is of the opinion that the merger will not be blocked and expects conditions that may be imposed to be immaterial to the rating.
Diageo plc, expected to be formed in December 1997 from the merger of Guinness PLC and Grand Metropolitan plc, will be a leading global food and drink company. Guinness PLC is a global spirits and beer company headquartered in London, England. It is the world's leading producer of Scotch whisky and stout beer. Grand Metropolitan plc, also headquartered in London, is one of the world's leading distillers and food companies. It owns the Pillsbury and Burger King brands.
No Related Data.
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