MOODY'S LOWERS RATINGS OF DILLARD'S, INC. AND MERCANTILE STORES COMPANY, INC. (SENIOR UNSECURED TO Baa1)
New York, 07-22-98 -- Moody's Investors Service lowered the ratings of Dillard's, Inc. and Mercantile Stores Company, Inc. based on the anticipated completion of the pending acquisition of Mercantile by Dillard's for about $2.9 billion in cash. The downgrade reflects the very significant increase in Dillard's debt as a result of the acquisition and the consequent sharp deterioration in coverage and leverage measures. The new rating level incorporates the good strategic fit of the acquisition, as well as Moody's expectation that debt protection measures will improve as the combination generates incremental sales, cost savings and increased buying clout with vendors. These downgrades complete the review begun on May 18, 1998. Moody's also assigned ratings to Dillard's senior unsecured bank agreement and its new multiple seniority shelf.
Senior unsecured bonds, debentures, notes and issuer rating to Baa1 from A2.
Senior unsecured shelf to (P) Baa1 from (P) A2.
Dillard Investment Company, Inc.
Senior unsecured notes to Baa1 from A2.
Commercial paper to Prime-2 from Prime-1.
Mercantile Stores Company, Inc.
Senior unsecured notes and debentures to Baa1 from A1.
Senior unsecured bank agreement at Baa1.
Senior unsecured shelf at (P) Baa1.
Subordinated unsecured shelf at (P) Baa2.
Preferred stock shelf at (P) "baa2".
Dillard Investment Company, Inc.
Senior unsecured bank agreement at Baa1.
Dillard's Capital Trust I, Dillard's Capital Trust II, Dillard's Capital Trust III, Dillard's Capital Trust IV, and Dillard's Capital Trust V:
Capital securities shelf at (P) "baa2".
"Stable. Dillard's is appropriately positioned at its current rating levels given the strategic fit of Mercantile and the combined company's strengthened market share in a consolidating industry, as well as the very high post-acquisition leverage. However, the current rating level assumes that debtholder protection measures will improve as Mercantile is absorbed into Dillard's and as the larger company realizes synergistic cost savings and revenue opportunities."
Dillard's will buy Mercantile for $80 per share or about $2.9 billion in cash, in addition to the assumption of Mercantile's existing debt. Approvals have not yet been received from the Federal Trade Commission and the Office of the Comptroller of the Currency. The Milliken family, holders of about 40% of Mercantile stock, has contractually agreed to the transaction, and Dillard's unexpired tender has brought in about another 43% of shares to date. Moody's anticipates that the transaction will be completed as contemplated very soon.
The combination of Dillard's and Mercantile is a strong strategic fit. Both are regional full-line department stores operating in the same general trade areas and targeting the same moderate and better customers. Both offer both national brands and private label merchandise. Both companies are historically stable, financially prudent, family-controlled businesses. Such common characteristics should ease the normal challenges of operational combination.
The absorption of Mercantile by Dillard's will bolster the merged company's market share in its trade areas. Greater clout with vendors, which could be seen as early as fall 1999, along with administrative consolidation, should result in synergistic cost savings. However, this $2.9 billion cash acquisition will dramatically increase leverage. To reduce its very high post-acquisition debt level, the company plans to sell some stores. Other stores could be swapped; for example, the company and Belk, Inc. have signed a letter of intent to exchange 7 Mercantile stores for 9 Belk stores. Stores sold or swapped by Dillard's could range from 27 to 34. After-tax proceeds from proposed asset sales will reduce debt by a not immaterial amount soon after the acquisition. Moody's anticipates that the improvement in debtholder protection measures over the intermediate term from asset sales, increased revenues and lower costs will quickly yield leverage and coverage measures which are consistent with the new rating level.
Mercantile will be a subsidiary of Dillard's. Even though Mercantile's existing debt is not expected be guaranteed by Dillard's, the importance of Mercantile to the consolidated operations and Mercantile's solid financial condition justify the same rating level as the parent.
The company's bank facility is a senior unsecured revolving credit, available to both Dillard's and Dillard Investment Company, Inc. ("DIC") and maturing in May 2002. Each borrower guarantees the borrowings of the other thereunder. Moody's expects that consolidated funded debt (with the exception of existing Mercantile debt) will remain at Dillard's and DIC. The $2 billion multiple seniority shelf may also be accessed by one of five issuer trusts, who will issue thereunder capital securities that rank pari passu with common ownership interests except upon the occurrence of certain defaults, at which point they will be senior to common ownership interests. The only assets of a trust will be Dillard's debt securities which, Moody's anticipates, will be deeply subordinated debt instruments.
Dillard's, Inc., headquartered in Little Rock, operates 272 stores in 27 Southwest, Southeast, Mountain and Midwestern states. Mercantile Stores Company, Inc. has about 119 stores throughout 17 southern and midwestern states.
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