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Fitch: Rare M&A in EMEA Tobacco Sector Pressuring Ratings
June 8, 2015 / 10:38 AM / 3 years ago

Fitch: Rare M&A in EMEA Tobacco Sector Pressuring Ratings

(The following statement was released by the rating agency) LONDON, June 08 (Fitch) Fitch-rated EMEA tobacco companies have no scope for further debt-funded acquisitions at current ratings, nor share buybacks before 2017, Fitch Ratings says. This is because of leverage that is higher than we normally consider compatible with their ratings. Deal making ticked up in the last year, due to the materialisation of rare M&A opportunities in this consolidated industry and to currency movements that have made the assets more attractive to buy. But further acquisitions will likely result in negative rating actions unless they are either very small, or funded by equity. We revised the Outlook on British American Tobacco's (BAT) 'A-' rating to Negative last week, reflecting a combination of heightened litigation risks, our assumption of continued adverse currency movements and stretched credit metrics as a result of three planned M&A transactions: a USD4.7bn capital contribution to its associate Reynolds American (RAI) that will help fund RAI's acquisition of Lorillard, the remaining stake in Souza Cruz that BAT doesn't already own for up to GBP2.3bn and, most recently, Croatia's Adris Grupa for EUR550m. Together we expect these three M&A transactions, if completed in full, to increase funds from operations (FFO) adjusted net leverage to between 3.6x and 3.9x this year, up from an already high 2.7x in 2014. This will leave no headroom for further material M&A, other corporate actions or share buybacks before 2017, while a downgrade would be likely if leverage is above 3x in 2016 or above 2.8x in the medium term. We have not factored in any cash outflows as a result of last week's Canadian class action court ruling due to the potential for appeals and uncertainty over the final size and timing of any damages. Similarly the negative outlook on Imperial Tobacco's 'BBB' rating reflects the increase in leverage from its USD7.1bn acquisition of assets divested by RAI and Lorillard as part of their tie-up. We expect this deal to result in FFO adjusted leverage peaking at 4.3x in FY15 before declining to 3.6x in FY17, which would still be high for its 'BBB' rating. If Imperial implements its initiatives to enhance cash-flow generation and returns to profit growth over FY15 to FY17, there is a chance that Imperial's credit risk profile will improve and thus the Outlook could be revised back to Stable, but any further acquisitions that increased leverage would make this less likely. Philip Morris International lacks leverage headroom at its 'A'/Stable rating level, driven largely by debt issuance to fund previous share buybacks, adverse currency movements, challenging trading conditions in some of its key markets and a small Russian acquisition in 2013. We expect FFO gross adjusted leverage to peak in 2015 at above 3.5x before falling slowly by 2018 to the 2.5x-2.7x, which would be compatible with its ratings. The suspension of share buybacks from 2015 indicates PMI's willingness to protect its credit metrics. Contact: Ching Mei Chia Director Corporates +44 20 3530 1068 Fitch Ratings Limited 30 North Colonnade London E14 5GN Giulio Lombardi Senior Director Corporates +39 02 8790 87214 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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