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Rating Action:

Moody's rates Dr Pepper Snapple notes Baa1; outlook is stable

05 Dec 2016

New York, December 05, 2016 -- Moody's Investors Service today assigned a Baa1 rating to Dr Pepper Snapple Group, Inc ("Dr Pepper" or "DPSG") for its issuance of senior unsecured notes in multiple tranches. The rating outlook is stable. The proceeds will be used to finance the company's $1.7 billion acquisition of US beverage company Bai Brands, LLC ("Bai") and for general corporate purposes. The company's other ratings were unchanged.

RATINGS RATIONALE

The Baa1 senior unsecured rating is based on the company's solid portfolio of brands, many with leadership positions in their sub-categories, strong profitability, and good product diversity. The company's rating is also supported by strong liquidity and a balanced financial policy. Dr Pepper Snapple Group has historically articulated a conservative leverage (debt/EBITDA) target of 2.25 times on an adjusted basis to which it will manage its cash flow deployment. However the company will not achieve this level over the next 3-4 years as a result of DPSG's purchase of Bai. After the transaction closes in early 2017, Moody's expects leverage to remain in the high 2 times range, up from 2.1 times at the end of the September 2016 quarter. Deleveraging will occur at only a modest pace. There is little to no room at the current rating level for further sizable debt-funded transactions before leverage has been restored closer to the company's target level. DPSG has a historically conservative financial policy, solid profitability and strong portfolio of brands. These strengths are tempered by more limited geographic diversity than its global peers, and its comparatively greater focus on the declining carbonated soft drink ("CSD") category. It also depends on non-controlled distribution for approximately 40% of its product volume in the U.S. We note that the company's focus within CSDs is on the flavored CSD segment where the company holds an approximate 38.8% market share (measured by retail sales as reported by Nielsen according to the company's audited 10-K).

The Bai acquisition is credit negative because it will be debt funded, and Moody's expects deleveraging to be relatively slow, taking 3-4 years to return to the company's historical target range. Dr Pepper's management expects Bai will generate about $425 million in net sales in 2017. It's products include Bai branded enhanced water, carbonated water, and ready-to-drink teas, among others. It is one of Dr Pepper's "Allied Brands" in which it already holds a very small minority stake. Dr Pepper is very familiar with the brand since it already distributes the product and has helped to build the brand since its infancy. The loss of the brand to another purchaser would have been a loss of volume for the system. The transaction multiple is high, even after considering the present value of tax benefits of about $400 million. The price implies Dr Pepper's expectation of a continuation of Bai's rapid growth, recently at over 100% per annum, albeit from a small base. Moody's analysis considers the likelihood that growth of the newly acquired brands will slow in the highly competitive beverage market. Dr Pepper plans to moderate its share repurchase program to about $400 million per year. A more meaningful reduction of share repurchases would allow for faster debt reduction. Dr Pepper's willingness to allow leverage to remain above 2.25x for an extended period of time suggests a more aggressive financial policy than it has shown in the past. It also leaves little room for either performance softness or further debt financed acquisitions or shareholder distributions at the current rating level. The deal increases product diversity, adding attractive, fast growing beverage categories to Dr Pepper's product portfolio. This is a credit positive since Dr Pepper is more highly concentrated in the declining carbonated soft drink category than its beverage peers.

Dr Pepper's stable outlook assumes smooth integration of Bai and that leverage will be reduced over time. The rating could be downgraded if operating performance suffers, Dr Pepper engages in large debt funded share buybacks or further debt funded acquisitions, or if management shifts away from its leverage targets. Quantitatively, Debt to EBITDA approaching 3 times or EBITA margin sustained below 15% could lead to a downgrade. An upgrade would require that Dr Pepper gain considerably more scale and diversification, improve credit metrics and articulate a commitment to maintain debt to EBITDA below 2 times.

Headquartered in Plano, Texas, Dr Pepper Snapple Group, Inc. is a leading integrated brand owner, bottler and distributor of nonalcoholic beverages. It's products include flavored carbonated soft drinks and non-carbonated beverages (juices, juice drinks, readyto drink teas and mixers). Among the company's key brands are Dr Pepper, 7UP, Sunkist soda, Canada Dry, A&W, Snapple, Hawaiian Punch and Mott's.

The principal methodology used in these ratings was Global Soft Beverage Industry published in May 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Linda Montag
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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