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Rating Action:

Moody's downgrades Shiseido rating to A1 from Aa3; outlook stable

25 Mar 2010

JPY 50bn of Long-Term Debt Affected

Tokyo, March 25, 2010 -- Moody's Investors Service has today downgraded its senior unsecured rating of Shiseido Co., Ltd. (Shiseido) to A1 from Aa3. The rating outlook is stable. The action concludes the review initiated on January 15, 2010.

The rating action reflects Moody's view that Shiseido's financial leverage will remain higher than ever over the medium term. This will be due to the financial burden resulting from the company's acquisition of Bare Escentuals Beauty, Inc. (Bare Escentuals, not rated by Moody's), which has a strong market position in the mineral foundation category in the U.S.

The transaction, which amounted to about JPY160bn for over 90% shareholding of Bare Escentuals, was financed with a combination of cash on hand and debt. Shiseido financed JPY100bn of the purchase in short-term debt, and intends to refinance this short-term debt with permanent financing, including long-term loans and bonds, within one year. In addition, the company took on about JPY20bn of Bare Escentuals' external debt.

"This acquisition is consistent with Shiseido's overall business strategy and should over the medium term enhance its product portfolio and strengthen its operations, not only in the U.S. but also in Japan. However, it will take several years to restore its financial fundamentals to the level of those before the acquisitions," says Noriko Kosaka, a Moody's VP/Senior Analyst.

Moody's estimates that new debt will increase Shiseido's adjusted debt to capitalization ratio for FYE3/2010 to about 45%, from 29.3% at the end of March 2009. Moody's forecasts that this ratio will stay above 40% for the next few years, although the ratio should improve gradually.

Bare Escentuals has a strong market position in the mineral foundation category in the U.S. The company is less than 10% the size of Shiseido with only limited international sales in Japan and a few countries in Europe.

"The acquisition will enable Shiseido to enhance its geographic diversification -- one of its weak rating factors compared with its global giant peers -- by leveraging Bare Escentuals' brand equity and market position in the U.S., in tandem with its own sales channels, marketing power, and operating infrastructure," adds Kosaka, also Moody's Lead Analyst for the company.

Bare Escentuals also has a much higher EBITA margin than Shiseido -- 30.9% for the fiscal year ended in December 2009 (based on Moody's standard financial adjustments). Moody's continues to focus on how Shiseido will be able to improve its overall profitability by quickly realizing synergies with Bare Escentuals in addition to efforts it is already making to reinforce its cost structure.

The rating reflects Moody's belief that the company will maintain its prudent financial policy of balancing business and financial risks. The rating also considers Shiseido's stable and strong relationships with its major banks as one of the regional factors in Japan, which uplift its rating by two notches from its fundamental level of credit worthiness.

The stable rating outlook reflects Moody's view that Shiseido's overall credit profile will continue to be strong, as it is supported by a solid market position and stable cash flow.

Significant deterioration of its market position and failure to improve its balance sheet structure, despite its current strong efforts to further reinforce its business fundamentals, would put downward pressure on the rating. For example, we would consider a negative rating action if Shiseido's adjusted debt/capitalization ratio rises and remains over 45%, while adjusted Debt/EBITDA remains over 3.0x over the medium term.

Meanwhile, if Shiseido's balance sheet and profitability improve from FYE3/2011 as a result of synergies achieved by the consolidation with Bare Escentuals and steady growth in the business overall, the rating would be pressured upward. For example, we would consider a positive rating action if adjusted debt/capitalization ratio dropped below 35%, or if adjusted Debt/EBITDA ratio improved to around 2.0x over the medium term.

Moody's last rating action with respect to Shiseido was taken on January 15, 2010, when the company's senior unsecured rating was placed under review for possible downgrade.

The principal methodology used in rating this issuer was "Moody's Global Packaged Goods Industry," published in July 2009, which can be found at www.moodys.com in the Research & Ratings directory, in the Rating Methodologies subdirectory.

Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies subdirectory.

Shiseido Co., Ltd., headquartered in Tokyo, is a leading producer of cosmetics and hair care products in Japan. The company's consolidated sales for FYE3/2009 were JPY690.3bn.

Tokyo
Noriko Kosaka
Vice President - Senior Analyst
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Shinsuke Tanimoto
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's downgrades Shiseido rating to A1 from Aa3; outlook stable
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