12 International Financing Review February 29 2020Top news
Food companies fight for sales growth,
hamstrung by leverage
Bonds Levered up food and beverage outfits exposed to downgrades if they invest too quicklyBY WILLIAM HOFFMANHighly leveraged food and
beverage companies face tough
decisions on how to grow sales
while reducing debt amid a fast
changing consumer landscape.
Companies in the sector are
weighing two different avenues for
growth: acquisitions or organic
sales through existing brands.
Both strategies require
investment – but food and
beverage names are at risk of
being downgraded to junk if
they spend too heavily in their
reach for growth, having failed
to meet their deleveraging
targets from the last bout of
M&A in 2018.
It is a classic build versus buy
debate.
“What do they do for growth
going forward?” asked Meredith
Contente, high-grade credit strategist
at Amherst Pierpont Securities.
“Acquisitions are obviously a
growth vehicle, and if they look
to acquisitions before they’ve hittheir leverage targets they would
be levering up on already
somewhat higher leverage.”BOOSTING SALES
Many food and beverage
companies levered up in 2018 to
fund splashy M&A deals that
were supposed to help them
adapt to consumer trends in
healthy eating.
For example, that year Slim
Jim-maker Conagra Brands
issued a US$7.025bn bond to pay
for the acquisition of Pinnacle
Foods, Cheerios producer
General Mills issued a US$6.05bn
bond to fund its acquisition of
Blue Buffalo Pet Products and
Campbell Soup priced a
US$5.3bn bond for its purchase
of Snyder’s Lance.
Leverage spiked as high as 5.
times net debt to Ebitda on those
deals, but rating agencies gave
the companies until 2021 – a
year more than usual – to meet
deleveraging targets, Contente
said.And yet nearly two years into
those deals, companies are not
seeing the sales growth they had
hoped for.
Earlier this month one of the
most highly leveraged names,
Conagra Brands, revised its
ORGANICûSALESûTOûmATûORûJUSTûû
GROWTHûINûTHEûlSCALûYEAR ûWHICHû
is a reduction from its already
paltry 1%-1.5% earlier forecast.
“We’ve just found that the
execution wasn’t there [across
the sector],” said Jon Duensing,
director of investment-grade
corporates at Amundi Pioneer.
Growing sales by simply hiking
prices has not worked, either.
Kraft Heinz, which was
downgraded to junk earlier this
month, saw US organic net sales
decline by 2.7% in the most
recent quarter after it attempted
to raise revenues through a 3.1%
price hike, according to a
Barclays report.
“Prices increase and then lower
volumes offset that increase, so
YOUREûSEEINGûmATûTOûSLIGHTLYûnegative organic sales growth,”
Contente said. “That’s telling me
that there might be a problem
with growth moving forward if
they can’t get price hikes through.”JUNKED
Kraft had hoped that asset sales
would have taken some of the
lNANCIALûPRESSUREûOFF ûBUTûTHESEû
ultimately proved a tough sell.
The company was in
discussions to sell a number of
its brands including
Breakstone’s butter and sour
cream, Plasmon baby food,
Maxwell House coffee and Oscar
Mayer processed meats. The
sales were shelved amid tepid
private equity interest in the
brands that were said to require
SIGNIlCANTûINVESTMENT û
according to reports in summer
2019.
“What they failed to do is
invest in the brand,” said
Michael Cho, an investment
grade portfolio manager at Aviva
Investors.Jumbo financing for ThyssenKrupp unit
Loans Goldman Sachs expected to lead up to €11bn of loans and bonds for lift company acquisitionBY CLAIRE RUCKINA group of banks are providing
up to €11bn of loans and bonds
to back Advent, Cinven and RAG
Foundation’s €17.2bn
acquisition of ThyssenKrupp’s
elevators division.
The bidding group prevailed
against a rival consortium
comprising Blackstone, Carlyle
and the Canada Pension Plan
Investment Board.
The bank group is still being
decided, though Goldman Sachs is
expected to lead the debt
lNANCINGûALONGSIDEûAûNUMBERûOFû
other banks set to include
Deutsche Bank, Barclays, Credit
Suisse, RBC and UBS for Europe’s
biggest buyout since 2007.The bank group is expected to
increase further with a number
of other banks likely to join the
lNANCING ûWHICHûCOMPRISESû
between €7.0bn and €8.5bn of
funded debt and a massive
€2.5bn of unfunded facilities.
The funded debt will comprise
senior loans, bonds and
subordinated bonds, and could
also include a PIK-type
instrument.
4HEûlNANCINGûWILLûBEû
denominated in euros and US
dollars, and the sell-down is
likely to be a second-quarter
event.
There are some fears that the
fast-spreading coronavirus could
DISRUPTûTHEûlNANCINGûGIVENûTHEû
company’s exposure to Asia.However, it is a eagerly
awaited, large, event-driven
lNANCING ûWHICHûISûEXACTLYûWHATû
cash-rich investors have been
desperate to invest in following
a lack of meaningful new money
deals in 2020.
“Everyone’s been waiting for
this. We will have to see how
things play out on the wider
stage but it is expected this unit
will be popular,” an investor said.
The unfunded facilities
comprise €1.2bn of guarantee
facilities, a €500m revolving
credit facility and €800m of
surety bonds.
M&A banks held meetings with a
broad array of banks and insurance
companies in January to discuss
raising the unfunded facilities.It is expected that the existing
investors in the surety bonds
will roll into the new ones, and
while formal commitments
haven’t been received to cover
all the guarantee and revolving
credit facilities, there have been
strong indications of support.
“The unfunded facilities are
not fully accounted for and
while it is an issue it is not an
insurmountable issue, because
the market has been sounded
out and banks are pleased with
the indications of appetite,” a
senior banker said.
The expectation is that the
initial underwriting group will
be joined at a later stage by a
number of other banks agreeing
to take the unfunded facilities4 IFR Top news 2322 .p 4 - 14 .indd 12 28 / 02 / 2020 19 : 41 : 47