International ratings service Fitch Ratings has initiated coverage of the new Dean Foods Co, assigning a ‘BB+’ secured credit facility rating and ‘B-‘ trust convertible preferred securities rating.
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Fitch’s rating of the senior unsecured notes that were outstanding prior to Suiza Foods Corp acquisition, and on Rating Watch Negative have been downgraded to ‘BB-‘ from ‘BBB+’. Fitch has also withdrawn the old Dean Foods commercial paper rating of ‘F2’, which was also on Rating Watch Negative. The Rating Outlook is Stable
Suiza acquired the old Dean Foods Co on 31 December 2001, and immediately after the completion of the merger, changed its name to Dean Foods Co. The aggregate purchase price was US$1.7bn, which included US$756.8m of cash paid to old Dean stockholders, common stock valued at US$739.4m and estimated transaction costs of US$55.7m.
In connection with the acquisition, Suiza purchased the 33.8% stake that Dairy Farmers of America had in Suiza’s Dairy Group for US$145.4m in cash and other consideration. Debt assumed was about US$956m, including US$654m was the old Dean senior unsecured notes. The total acquisition cost of Dean was US$2.7bn or 8.3x EBITDA. About US$1.9bn was financed with borrowings from Suiza’s secured credit facility. The new Dean expects to achieve cost savings of US$80m per year beginning in 2002 increasing to US$120m by the end of 2004. Assuming the acquisition occurred at the beginning of 2001 EBITDA-to-interest incurred including dividends on the preferred securities was approximately 3.6x and total debt including preferred securities-to-EBITDA was 4.1x.
The ratings consider the new Dean Foods Co leading market share in the fluid milk industry (of approximately 30%), its proprietary national refrigerated distribution system, increased geographic diversification, which also provides it with national scale and capabilities. The new Dean Foods Co’s management team also has a solid track record of effectively integrating acquisitions and achieving cost savings. The company has also been successful with new product innovations. These positives are weighted against high leverage due to acquisitions, decreasing per capita consumption of fluid milk in the US, the new Dean Foods Co’s key profit contributor, and integration risk associated with the acquisition of the old Dean Foods Co.
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By GlobalDataFor the latest year ended 31 March 2002, total debt including preferred securities-to-EBITDA was 5.6x and EBITDA-to-interest incurred, including dividends on the preferred securities was 3.9x. Credit protection measures are expected to improve from current levels, reflecting the full operating earnings and cash flow contribution from the old Dean Foods Company and cost synergies. While the company is expected to continue to participate in the consolidation of the dairy industry, in the near term, Fitch does not anticipate any sizeable debt financed acquisition.
