DBRS Places Saputo Inc. Under Review with Negative Implications Following Announcement to Acquire Dairy Crest Group plc

DBRS Limited (DBRS) placed the Issuer Rating and the Senior Unsecured Notes rating of Saputo Inc. (Saputo or the Company) Under Review with Negative Implications following the Company’s announcement on February 22, 2019, that it had entered into an agreement with Dairy Crest Group plc (Dairy Crest) to acquire the shares of Dairy Crest for GBP 6.2 per share (the Acquisition). This would value Dairy Crest’s equity at approximately GBP 975 million (approximately $1.7 billion). DBRS expects that Saputo would also assume Dairy Crest’s gross debt, which is currently GBP 246 million (approximately $420 million) as of September 30, 2018. The Acquisition is expected to be financed entirely through a new bank term loan facility. The Acquisition is subject to shareholder approval, court's sanction and other customary conditions and would likely close in the second quarter of calendar-year 2019.

Dairy Crest manufactures and markets cheese, butters, spreads and oils under well-known British brands, such as Cathedral City, Clover, Country Life and Frylight, and value-added dairy ingredients in the United Kingdom. Dairy Crest employs approximately 1,100 people in seven locations across the United Kingdom. In the last 12 months (LTM) ended September 30, 2018, Dairy Crest generated revenue of GBP 460 million and EBITDA of GBP 90 million. The Acquisition would broaden Saputo’s geographic diversification as it enters a new market in the United Kingdom, where it currently does not have any operations.

The Under Review with Negative Implications status reflects DBRS’s view that, if the Acquisition closes as planned, Saputo’s financial profile would no longer be commensurate with its current rating. At the close of the Acquisition, DBRS estimates that pro forma lease-adjusted debt-to-EBITDAR will increase toward 3.5 times (x) from 2.2x in the LTM ended Q3 F2019. On November 21, 2018, DBRS confirmed Saputo’s A (low) ratings and expected the Company to maintain leverage of lease-adjusted debt-to-EBITDAR below 2.2x.

DBRS believes that, while the increased financial leverage will require a negative rating action, the severity of such action is likely to be moderated by Saputo’s free cash-generating capacity and DBRS’s expectation of deleveraging over the near to medium term.

DBRS estimates that pro forma consolidated revenues and EBITDA will shift upward to approximately $13.8 billion and $1.4 billion, respectively, in F2020. DBRS forecasts that consolidated revenues will grow in the low-single digits over the medium term and EBITDA should grow to approximately $1.5 billion in F2021, primarily as a result of improving product mix and pricing.

In terms of cash flows, DBRS estimates that the Company will generate between $1.1 billion to $1.2 billion of operating cash flow per year in the next two years. Cash outlays related to dividends are expected to remain steady in the range of $260 million to 280 million per year as Saputo continues to target a dividend payout ratio of 30% to 35% of net earnings. The Company’s capex is expected to be an average of approximately $350 million per year. As such, free cash flow (FCF; before changes in working capital, but after dividends) is expected to be approximately $500 million for each of the next two years.

DBRS recognizes that Saputo possesses the ability to deleverage at a good pace going forward, based on its expected sound free cash flow generation. DBRS expects that Saputo will abstain from share repurchases and use FCF for debt reduction over the medium term. As such, DBRS estimates that the Company will reduce balance-sheet debt by approximately $1.0 billion by the end of F2021. This, combined with growth in EBITDA, should result in financial leverage acceptable for the BBB (high) rating category (2.2x to 2.75x) by the end of F2021.

DBRS will continue to monitor as more information becomes available and aims to resolve the Under Review status before the closing of the Acquisition.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Companies in the Consumer Products Industry, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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