Fitch Places Saint-Gobain On Rating Watch Negative (SGOB.PA
LONDON, December 11 Fitch Ratings has placed Compagnie de Saint-Gobain's Long-term Issuer Default Rating and senior unsecured rating of 'BBB' on Rating Watch Negative . The Short-Term IDR of 'F2' has also been placed on RWN. This follows the group's announcement of its CHF2.75bn acquisition of Sika AG.
The RWN reflects the uncertainty surrounding Saint-Gobain's de-leverage profile following the Sika acquisition and execution risk around the sale of Saint-Gobain's remaining packaging unit Verallia, which could offset the purchase consideration paid for Sika. Fitch will adjust Saint-Gobain's credit metrics to reflect its 16% economic interest in Sika, accounting for the proportion of dividends attributable to Saint-Gobain as funds from operations , around EUR20m as at FY13. This compares with the expected full consolidation by Saint-Gobain of Sika's entire FFO, around EUR500m as at FY13. This treatment results from the 52% voting rights attached to the acquired 16% stake.
Without the sale of Verallia, FFO adjusted net leverage is expected to reach around 3.8x in 2015, moderately lower than 3.9x as at FY13. Saint-Gobain could de-lever to below our negative guidance of 3.5x as previously expected, following the divestment of Verallia, improved organic growth and a potential hybrid bond issue . To resolve the RWN we would need removal of the execution risk and clarity on the terms of the Verallia sale and the potential hybrid bond.
KEY RATING DRIVERS
Saint-Gobain's business profile will partially benefit from Sika's exposure to high-growth emerging markets, particularly in Asia, and higher-margin, value-added product portfolio compared with the group. However, the economic interest is 16% and we view these benefits as limited. In addition, management plans to reap EUR180m in annual synergies in 2019 from purchase, overhead and capex savings and additional sales from cross-selling of the two companies' complementary products. Around two-thirds of these synergies are expected to be at the Saint-Gobain level.
Recovery Despite FX Headwinds
End-markets are showing slow signs of recovery with Europe and North America outperforming France. Like-for-like group organic revenue growth was 2.7% for the first nine months of 2014, supported by healthy growth from innovative materials and construction products, although actual growth declined by 1.8% from FX headwinds and the disposal of Verallia North America .
The group's cash generation will be supported by around EUR800m in cost reductions and lower restructuring costs in 2014 and 2015. Its successful cost-cutting programme has yielded in excess of EUR1bn cumulative cost savings in 2013 on a 2011 cost base.
Fine Offsets VNA Sale
Disposal proceeds from the group's EUR1.3bn sale of the group's packaging unit, VNA, mitigates the negative impact on credit metrics in 2014 of a large EU antitrust fine related to the group's flat glass business. Although there are limited synergies with the remainder of the group, packaging has historically had a stabilising effect on the group.
Working Capital and Capex Control
Management has decisively reduced capex to around 3.5% of sales from around 4.8% in 2011 in light of its earnings weakness over the past two years. We forecast moderate increases of capex over the next two years, based on around EUR1bn in maintenance and around EUR500m in expansion capex. In addition, it has also successfully reduced working capital over the past decade to around 30 days in 2013 from around 60 days in 2002.
Fitch will adjust FFO net leverage calculations for Saint-Gobain by deconsolidating the planned Sika acquisition and adding back the dividend proceeds to FFO. We continue to adjust metrics to account for EUR1bn of cash that we view as not readily available for debt repayment, as it is needed for operational working capital.
Positive: Future developments that could lead to positive rating action include:
- Successful removal of the execution risk around the sale of the remaining Verallia business.
- Improved organic operating performance and ability to maintain a positive FCF margin.
- FFO adjusted net leverage below 3.5x on a sustained basis . Fitch would not tighten the guidance following the remaining disposal of the Verallia business.
Negative: Future developments that could lead to negative rating action include:
-Deterioration of operating performance measures.
-Inability to maintain a positive free cash flow margin.
-FFO adjusted net leverage above 3.5x on a sustained basis.
Liquidity is adequate and amounts to EUR7.3bn at end 1H14, comprising of EUR3.3bn cash and EUR4bn of unused bank facilities. This is sufficient to cover EUR2.1bn of debt maturities over the next 12 months and the short-term funding bridge of the Sika acquisition until a long-term funding plan is executed.
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Applicable criteria, 'Corporate Rating Methodology' dated 28 May 2014, are available at .
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage