Moody's affirms Post ratings on heels of Weetabix deal

by Eric Schroeder
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Weetabix cereal and Alpen bars
Moody’s affirmed all its debt ratings of Post Holdings following the company’s agreement to acquire Weetabix Food Co.

NEW YORK — Moody’s Investors Service has affirmed all its debt ratings of Post Holdings, Inc. following the St. Louis-based company’s April 18 announcement that it has agreed to acquire U.K.-based Weetabix Food Co. for $1.77 billion. The ratings agency also maintained its “stable” outlook for Post.

“The ratings affirmation reflects the slightly negative effect that the proposed transaction will have on financial leverage and the resulting increased exposure to the declining, but highly profitable ready-to-eat cereal category,” Moody’s said. “Positively, Weetabix will add new geographies that could allow Post to extend its mostly U.S. brands overseas.”

Based in Burton Latimer, U.K., Weetabix is the manufacturer of cereals, mueslis, oat granolas, breakfast drinks and nutrition bars sold under such brands as Weetabix, Oatibix, Alpen and Barbara’s.

Moody’s said while Post could fund most of the acquisition internally with its $1.5 billion of cash on hand, indications are the company is considering financing a portion of the transaction with an incremental secured bank term loan.

“The transaction will further concentrate Post’s portfolio in the ready-to-eat cereal category, which has had relatively flat sales in the U.K. in recent years as compared to the U.S. where breakfast cereal sales have been gradually declining for years,” Moody’s said. “However, the category generates high profit margins and cash flows in both markets, which supports Post’s growth strategy that leverages free cash flow to fuel acquisitions.”

Moody’s affirmed Post’s corporate family rating at B2, a level the ratings agency said reflects Post’s investment holding company profile that is characterized by a “growth through acquisitions” strategy and related periods of high financial leverage.

Post Pebbles cereal
Post's portfolio is led by its R.-T.-E. cereal business.

“Post’s ratings are supported by attractive profit margins and strong cash flows generated by its diversified business portfolio led by the R.-T.-E. cereal and commercial egg businesses,” Moody’s said. “The ratings also are supported by moderate product and geographic sales diversification that have improved over time through acquisitions. These strengths are balanced against high earnings volatility resulting from integration activities of newly acquired companies and from the largely commodity-based Michael Foods egg business.

“Post’s future growth strategy will be determined largely by its access to acquisition financing, which we expect will be good for the foreseeable future. Moody’s expects that between acquisitions, Post will target relatively modest financial leverage to provide financial cushion against future releveraging transactions.”

Moody’s also said that Post’s liquidity profile is “very good,” noting that the company currently has significant available liquidity sources, including $1.5 billion of cash, an $800 million senior secured revolving credit facility and about $500 million of annual cash from operations.

The ratings could be downgraded if operating performance deteriorates, if debt to EBITDA is sustained above 7 times, or if free cash flow turns negative, Moody’s said, while the ratings could be upgraded if the pace of Post’s acquisitions slows, operating profit margins stabilize in the R.-T.-E. cereal and egg businesses and debt to EBITDA is likely to be sustained below 5.75 times. 
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