May 05 (Fitch) Fitch Ratings has today affirmed Foster’s Group Limited’s (Foster’s) Long-Term Issuer Default Rating (IDR) at ‘BBB’ and Short-Term IDR at ‘F2’. The Outlook is Stable.
The rating affirmation follows Foster’s 4 May 2011 announcement that the Supreme Court of Victoria had approved the Scheme of arrangement for the demerger of Treasury Wine Estates Limited. The Scheme was approved by shareholders at the Scheme Meeting held on 29 April 2011. Fitch concluded that the credit profile of the post-demerger “New” Foster’s, consisting of Carlton and United Breweries and the International Beer Business, remains commensurate with the pre-demerger Foster’s ‘BBB’ rating.
Foster’s credit profile is supported by its leading market position in the duopolistic local beer market. “The Australian beer market is considered mature, with loyalty to incumbent local brewers, capital intensiveness and retailer shelf space acting as significant barriers to entry. These characteristics support the long-run collection of economic rents with modest levels of recurring investment requirements,” said Johann Kenny, Director in Fitch’s Corporate team.
Constraints to Foster’s rating include its modest global scale and its limited geographic and product related diversification. Notwithstanding the adverse impact of the demerger on said product and geographical diversification, an improved management focus, asset intensity and a reduced exposure to the cyclical cash flow impacts associated with agricultural assets, will support the quantum and stability of Foster’s cash flow generating capacity.
“Short term risks to Foster’s credit rating profile include the threat of corporate action and the execution of the demerger strategy within the management announced demerger cost estimates,” added Mr Kenny. Fitch takes comfort from the fact that Foster’s has strong cash flow coverage and leverage metrics that provide some headroom and capital structure flexibility within the BBB range.
Longer term risks to Foster’s credit rating profile arise from secular changes in consumer preferences leading to a decline in aggregate market share in the event of an unchanged sub-segment mix. Fitch considers Foster’s short-term priority to realign and reinvest in its beer portfolio to be appropriate. Fitch also notes that Foster’s has the required financial flexibility to effect such a change.
Should the financial structure post-demerger result in an improved financial profile such that adjusted net debt (i.e. capitalised for operating lease expense) falls to below 2x EBITDAR on a sustainable basis, then a positive rating action could result. Negative rating action may result from adjusted net debt to EBITDAR increasing to over 3.5x, and FFO interest cover reducing to below 3.75x on a sustainable basis.
Foster’s is an Australia-based global producer and marketer of alcoholic beverages. Since its establishment in 1962, the company has owned and operated iconic Australian beer brands such as “VB” and “Carlton Draught”.
Heineken Reckons Ethiopians Would Drink More Beer Given the Chance
If companies head to emerging markets to fuel top-line growth, many of them have the so-called BRIC countries in mind. By contrast, Dutch Brewer Heineken said Thursday it is about to buy two state-owned breweries in Ethiopia for a total of $163 million.
The fast growing and profitable Ethiopian market is a good pick for Heineken, which sees sales flat in mature markets. Ethiopian beer consumption has grown by around 20% a year for the past five years with the average annual consumption of beer around 3 liters per person at present. With a global annual average beer consumption of 27 liters per person, there is ample opportunity to get the Ethiopians to drink more beer.
The flipside of Ethiopia however is its fragile political system. The country’s political stability is currently rated at D by the Economist Intelligence Unit, with E being most risky. And the nation’s first ever multiparty elections were held just a decade ago.
That a brewer is not immune to political turmoil in a country can be illustrated by Heineken’s Egyptian operations. The brewer was forced to shut down its operations for two consecutive weeks during the unrest in January, hurting first quarter volumes.
To be fair, Heineken has long been criticized by the market for its over-exposure to the low growth Western European market where it generates around a third of its operational profit, hence expansion in the fast growing and profitable African market is most welcome to boost its earnings.
But a move into the rapidly expanding Asian market may be a safer bet. On Wednesday, Heineken’s peer Anheuser Busch InBev reported that its premium brands, such as Budweiser, grew over 7% in the first quarter in China. Heineken has hardly any presence in China, but aims to opens its own brewery there during the summer where it will make its premium brand Heineken. In the hope, of course, that it will refresh the parts other beers cannot reach.