The AAA Senior Corporate Debt Rating for Nestle S.A. (“Nestle” or “the Company”) is being placed “Under Review with Negative Implications” following today’s announcement that the Company has entered into an agreement to acquire Ralston Purina Company (“Ralston”) for a total purchase price of US$11.7 billion. Nestle’s financial strength has been very strong with cash flow exceeding net debt levels for the past three years and EBITDA interest coverage rising to over 11 times in F1999. However, the acquisition is being largely debt financed and will reduce Nestle’s overall financial flexibility in the near term. During the past five years, Nestle has maintained net debt levels in the Sfr6 billion range but the Ralston acquisition will cause this to rise significantly. The Company typically produces a high level of free cash flow (Sfr3.0 billion in F1999) and will discontinue share repurchases (Sfr2.3 billion in F1999), but it will take at least two years before net debt levels and cash flow to total debt recover back to historical levels. The recovery of financial strength could take longer as it is dependent upon strong earnings gains and a smooth integration of Ralston. Furthermore, the Company will likely continue to review all strategic acquisition opportunities as they arise.
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Otherwise, the acquisition is viewed positively as it should be a good fit from both a geographic and product standpoint with Nestle’s existing pet food operations and expected synergies should enhance profitability. The combination of Ralston’s pet food business (annual sales of Sfr4.3 billion) with Nestle’s pet foods business (Sfr5.5 billion) will create the largest global pet food company with the leading share in North America and Europe. The merger is a good geographic fit with Ralston generating 84% of its sales from North America and 9% from Europe compared to Nestle’s pet food business which derives 40% of sales in North America and 48% in Europe. The product lines are complimentary as Ralston’s core competance is in dry pet food (world’s largest producer of dry dog and cat food) while Nestle’s strength lies in canned pet food. Ralston is an efficient manufacturer and enjoys high levels of profitability with EBIT margins in the 20% range. Unlike most other recent acquisitions in the consumer products area, synergies are expected to be signficant, amounting to just under US$300 million by 2003, (70% from overhead) or about 8% of Ralston sales.
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