Dr Pepper Snapple provisionally rated Baa3
March 24, 2008
by Josh Sosland
NEW YORK — In anticipation of the spinoff of Dr Pepper Snapple Group, Inc. as an independent company, Moody’s Investors Service has assigned a provisional Baa3 rating to debt planned as part of the formation of the company.
D.P.S.G. is currently the Americas Beverage unit of Cadbury Schweppes P.L.C. and is set to be spun off shortly as a tax free transaction. The new company, which will be listed on the New York Stock Exchange, is proposed to have $500 million of senior unsecured revolving credit and a $1.9 billion senior unsecured bank term facility.
Within the Moody’s system a Baa3 rating is the lowest investment grade rating. A downgrade to Ba1 would place the company’s debt at the highest level of the Moody’s speculative grade ratings.
Moody’s said the rating outlook is stable and that the final rating is subject to the completion of the spin-off and final reviews.
All told, $3.9 billion in funded indebtedness will result from the spinoff, reflecting a $3.7 billion payment to Cadbury Schweppes, $100 million for cash needs and $100 million in transaction fees and expenses. Moody’s estimated the debt equates to 3.1 times 2007 EBITDA.
For the portion beyond the $2.4 billion of debt rated by Moody’s, a $2 billion bridge facility has been entered with the expectation of debt sales in public markets.
Moody’s said the Baa3 rating and stable outlook reflect the "solid portfolio of brands, many with leadership positions in their sub-categories" enjoyed by the Dr Pepper Snapple Group business. Moody’s also cited strong profitability and product and geographic diversity as strengths.
These positives are "offset by initial leverage that is at the high end of the acceptable range for an investment grade company, dependence on non-controlled distribution for a large proportion of its product, a difficult commodity cost environment and the lack of a track record as an independent company," Moody’s said.
Elaborating on the stable outlook, Moody’s said it is based on the expectations that leverage will be reduced over the medium term by maintaining profitability and focusing on debt repayment rather than diverting cash to shareholders. The rating also anticipates the company will "term out its bridge facility within the first few months after closing" while maintaining additional access to liquidity as needed.
To be headquartered in Plano, Texas, Dr Pepper Snapple Group is expected to have $6 billion in 2008 sales.