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22 Nov 2005
MOODY'S DOWNGRADES METRO AG'S LONG-TERM RATING TO Baa2; STABLE OUTLOOK
Paris, November 22, 2005 -- Moody's Investors Service today downgraded the long-term
senior unsecured rating of Metro AG ("Metro" or "the
company") to Baa2 from Baa1. The rating action reflects Moody's
view that, in light of the company's announcement of weak
third-quarter results and despite the expected proceeds from the
initial public offering ("IPO") of home improvement unit Praktiker,
which will be applied to reducing debt, Metro will be unable to
deliver the necessary improvements in its credit metrics to support a
Baa1 rating. The company's Prime-2 short-term
rating remains unchanged. The rating outlook is stable
More specifically, the rating downgrade has been prompted by Moody's
concerns that the company has been rebuilding its credit metrics at a
slower pace than the rating agency had earlier anticipated. In
this context, Moody's does not expect Metro to have made sufficient
progress to reach its targeted credit metrics by the end of 2005,
in light of the following factors, in particular:
(1) Metro's recent weak trading performance in its key German market
in most of the company's formats, as a result of the weak
economic environment and low consumption levels,
(2) The lack of progress in turning around Metro's troubled food
retail formats, and
(3) Moody's concerns that, despite the upcoming IPO of Praktiker,
the proceeds of which are to be applied to debt reduction and which Moody's
views as a positive, it may take more time than previously expected
by the rating agency for Metro to improve its credit metrics to levels
in line with the Baa1 category.
Metro's Baa2 rating is underpinned by the group's significant
scale in each of its main retail formats and its overall moderate business
risk in the context of the retail sector. The group's growth
and cash-flow generation rely very heavily on the two segments
in which it has its greatest national and international scale.
Firstly, Metro is by far the largest and most successful Cash and
Carry operator in Europe, with a unique wholesale business model
mostly targeted at bulk-buying professionals and supported by a
strong procurement scale. Moreover, it is the leading mainland
consumer Electronics Retailer through its well recognised Mediamarkt and
Saturn brands, supported by highly motivated store managers who
partly own their stores. The rating also incorporates Metro's
other less successful retail activities, all of which are mainly
focused on the German market and which face fierce competition:
although the Real hypermarket and Extra supermarket formats benefit from
the group's huge purchasing power, Extra lacks significant
scale and is exposed to pressure from hard discounters, whilst Real
has not succeeded in stabilising customer frequency and the Kaufhof department
stores are suffering from the sluggish consumption climate.
The rating is also supported by the geographical diversity of its earnings
and the continued successful expansion of its low-margin Cash and
Carry business and, to a lesser extent, its consumer electronics
retail formats outside Germany. As a result, international
activities now account for 51.4% of the group's sales.
Moody's notes that, although the expansion strategy reduces
dependence on the slow-growth German market, it may lead
to increased volatility in earnings. Moreover, Moody's
considers that the high degree of seasonality associated with the group's
EBIT generation weighs on the predictability of its cash-flow generation,
but also recognises that Metro's significant scale in its key retail
formats has helped to mitigate this risk to date.
The Baa2 rating takes into account the impact of the partial listing of
Praktiker, Metro's home improvement arm which has been successfully
repositioned over the recent past through a more price-oriented
strategy which has also entailed product rationalisation and an improved
private label penetration. Moody's notes that this turnaround
has been achieved in a fiercely competitive German DIY market.
Moody's considers positively the fact that the EUR330-380
million in expected proceeds from the listing will be applied to reduce
the group's debt level. Metro's credit metrics will
nevertheless be positioned in the Baa2 rating category over the intermediate
term, with net lease- and pension-adjusted debt to
EBITDAR between 3 and 3.5, Retained Cash Flow pre working
capital to net lease- and pension-adjusted debt in the mid
to high teens and total coverage around 3 (all ratios computed on average
debt rather than YE debt). Moody's also anticipates that
Metro's capacity to generate significant free cash flow will be
reduced as a result of the company's relatively heavy capital expenditure
Metro A.G., headquartered in Dusseldorf, Germany,
is one of the world's largest retailers, operating in both
food and non-food segments through a total of five store formats
in 28 countries. Group sales in fiscal year 2004 totalled EUR56.4
Eric de Bodard
European Corporates Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Vice President - Senior Analyst
European Corporates Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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