The Nation


Rating Action

S&P may downgrade ThaiBev on proposed acquisition

On July 19, Standard & Poor's Ratings Services placed its 'BBB' longterm corporate credit rating on Thailandbased beverage manufacturer Thai Beverage Plc on CreditWatch with negative implications, reflecting the debt burden to be incurred by the acquisition of Singaporebased conglomerate Fraser and Neave Ltd.

Moody’s Investors Service and Tris Rating also reacted similarly to ThaiBev’s plan. In its statement, Tris said that the F&N's share purchase is expected to strengthen ThaiBev's business profile, once the company begins to realise the anticipated commercial synergies. "However, this debt-financed acquisition will significantly weaken the ThaiBev's financial profile in the medium term. The debt to capitalisation ratio is likely to jump over 50 per cent, compared with the current level at 17.4 per cent as of March 2012. Tris said that if the leverage ratio is maintained beyond next couple years, the rating could be negatively affected.

ThaiBev on July 19 announced the agreement to buy a 22 per cent stake of F&N for 2.8 billion Singapore dollars.

F&N generated sales of S$6,274 million in fiscal year 2011 and S$2,588.6 million for the first six months of fiscal year 2012. Net profit was reported S$1,114 million and S$368.8 million, respectively.

In the next 3 months, S&P said it may lower the rating by one notch if the company’s deleveraging potential reduces its debttoEBITDA ratio to remain above 3 times over the next 24 months. The rating would be affirmed if Thai Bev’s financial risk profile improves to "intermediate" in the next 24 months. When the ratio of debt to EBITDA is less than 2.5 times and the ratio of debt to debt plus equity lower than 40 per cent by the end of 2014, that could indicate such improvement.

"The CreditWatch placement reflects our expectation that Thai Bev’s proposed debtfunded acquisition will weaken its financial risk profile, which we currently assess as "modest", over the next 24 months," S&P said in a statement.

It estimated that Thai Bev's debttoEBITDA ratio could weaken to about 3.2 times in 2012, following the acquisition, from 1 time in 2011. The ratio is expected to improve to less than 2.5 times by 2014 at the earliest, based on share of income from F&N. S&P also anticipated that Thai Bev's capital structure will weaken substantially over the next two years with a ratio of debt to debt plus equity above 50 per cent until 2014 compared with 25.6 per cent in 2011, on the assumption that the company's dividend payout will be 7580 per cent of net income in line with that in the past three years and that the acquisition would be fully debtfunded.

"The proposed acquisition is unlikely to positively influence our 'satisfactory' assessment of Thai Bev’s business risk profile for the next 24 months at least. We believe commercial synergies of the acquisition could take time to materialise, particularly given Thai Bev’s minority stake," it noted.

At "BBB", the rating reflects ThaiBev's dominant domestic market position in spirits and high and stable cash flows. Geographic concentration in Thailand, a still weak performance of Thai Bev’s beer division, and a growth strategy that may translate into more aggressive financial policies partly offset these strengths.

S&P noted that ThaiBev's liquidity is adequate, if the acquisition worth nearly Bt70 billion is not factored in. As of March 31, 2012, ThaiBev’s funds from operations stood at Bt16 billion. Domestic financial institutions have also been committed to extend Bt4.6 billion loans, and ThaiBev also has access to more than Bt36 billion in uncommitted credit lines.

Meanwhile, ThaiBev needs to repay loans worth Bt3.7 billion within 12 months and is expected to need working capital of Bt2Bt3 billion during the period.

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