ThaiBev rating remains on review for downgrade: Moody's

"While TCC's offer for F&N does not have an immediate impact on ThaiBev's ratings, it raises additional uncertainty regarding the motivation of its controlling shareholder and its influence over the group's strategic direction," said Annalisa di Chiara, a Moody's Vice President and Senior Analyst, in a statement released today. 

"There is also uncertainty related to Thai Bev's role in the overall strategy and its potential exposure to non-core businesses, like real estate. These factors will also play a critical role in our assessment of the company's credit profile and the final rating outcome," added Di Chiara, also the lead analyst for Thai Bev.

Last week, TCC Assets Limited announced that it would make a mandatory conditional cash offer for all of the issued and paid up ordinary shares of F&N that it does not already own directly or indirectly through Thai Bev. TCC's bid total 8.8 billion Singapore dollar (US$7.2 billion) in cash for the remaining 70 per cent stake in F&N.

Under Singapore's merger & takeover laws, a bidder has to make a mandatory offer for a company if it buys a 30 per cent stake. 

Thai Bev's stake, including TCC's stake in F&N, reached 30.36 per cent on September 13, thus triggering the mandatory general offer. 

ThaiBevalso announced that it will not incur additional debt or expend funds to acquire more F&N shares or to make an offer for F&N. As such, TCC has stepped forward to acquire the additional F&N shares and undertake the F&N Offer.

To date, ThaiBevhas spent around S$3.6 billion to acquire its own accumulated 28.9 per cent stake in F&N, which has been largely funded with debt.

Based on Moody's calculations, the company's debt to EBITDA currently stands at around 3.5 times, significantly higher than its historical level of less than 1 time. 

Thai Bev's ratings were placed on review on July 19 after it announced its purchase of a 22 per cent F&N stake, which resulted in higher leverage. The review will focus on the company's plan to reduce leverage over the short term. Furthermore, the fate of Asia Pacific Breweries (APB), in which F&N has a 40 per cent stake and which remains a strategic asset underpinning the transaction, still remains unclear. F&N shareholders will vote on the proposed sale of the APB stake to Heineken (Baa1 stable) on 28 September. 

Neither ThaiBev nor TCC have indicated how they will vote at the shareholder meeting. 

"The outcome of this vote will play a critical role in our assessment of Thai Bev's future credit profile. Should Heineken's bid for APB be successful, we expect ThaiBevto use a portion of the sales proceeds to reduce debt on its balance sheet, which would be credit positive," Di Chiara said.

However, Thai Bev's increased exposure to unrelated businesses, like real estate, may also imply new execution risks and a more aggressive risk tolerance by management and thus adversely impact its business risk profile - a credit negative.

Moody's will consider TCC Asset's cooperation and partnership with Thai Bev in consolidating effective control of F&N and providing oversight of the real estate businesses. The strategic fit of F&N's consumer beverage portfolio in the absence of APB, which owns the Tiger and Anchor beer brands, will also be assessed. 

On the other hand, if Heineken's bid for APB is unsuccessful and F&N retains its current ownership of APB, this would be a credit positive for Thai Bev, given the revenue diversity and international expansion opportunities associated with APB's distribution network and its leading market presence in the fastest-growing regions in Asia. 

 

However, the rating company added, these benefits may be outweighed by the weakening in the company's financial profile, as evidenced by leverage, defined as debt/EBITDA, in the 3.5x range. Moody's will also assess the overall growth strategy, the degree of oversight F&N would have over APB, any benefits that may accrue to ThaiBevover time, and the challenges of 

achieving the same.

It added that many elements of this transaction are still evolving, and there is no clarity at this time regarding the key credit factors, all of which will ultimately impact the company's financial position, growth strategy, and business composition.