Moody's: F&N's shareholder resolution credit negative to ThaiBev
Charoen Sirivadhanabhakdi's big move for Fraser & Neave was hailed as the Thai billionaire's success in expanding his empire, but it raises concerns for Moody's Investors Service.
In the "Moody’s Credit Outlook", Annalisa Di Chiara, vice president and senior analyst in the corporate finance group of Moody’s Investors Service HK, said that as a result of these developments, Thai Beverage’s leverage is likely to remain elevated, and, as a shareholder in F&N, its exposure to businesses unrelated to its core beverage business, such as real estate, implies new business risks.
She referred to F&N’s shareholder resolution to sell 40 per cent of Asia Pacific Breweries (APB) to Heineken for 5.6 billion Singaporean dollars (Bt140 billion). But the proposal to distribute the US$3.3-billion (Bt101-billion) capital gain was rejected. Both decisions are credit negative for ThaiBev.
Moody’s in August put ThaiBev’s "Baa2" rating under review for downgrade.
The cash distribution proposal lost because ThaiBev and TCC Assets, a vehicle controlled by ThaiBev’s main shareholders, Charoen and Wanna Sirivahanabhakdi, opposed it. ThaiBev and TCC together control 30.7 per cent of F&N.
Chiara noted that it is unclear why ThaiBev voted against the capital reduction. To date it has spent S$3.6 billion, all of it debt funded, to acquire its stake in F&N. Without the cash distribution, ThaiBev misses out on S$1.2 billion in proceeds that it could have used to reduce its debt. If all the proceeds had been used to reduce debt, ThaiBev’s debt-to-EBITDA ratio would have improved to about 3 times from 4.1 times.
Without the shareholder distribution, ThaiBev will remain reliant on internal cashflow generation to reduce debt, which means its balance sheet would remain stretched for a longer period of time.
Although APB, the maker of Tiger Beer, will be sold, ThaiBev, as a substantial shareholder in F&N, can still explore opportunities to expand its core non-alcoholic beverage business internationally. For example, ThaiBev could access F&N’s consumer beverage regional network to distribute its beverages and could introduce F&N beverages to the Thai market.
Such opportunities would be aligned with the company’s strategy to expand internationally, but because it is uncertain if ThaiBev can execute quickly or successfully, any cashflow benefits will not be immediate.
Furthermore, ThaiBev’s stake in F&N exposes it to an unrelated business, real estate. Following the disposal of APB, real estate will account for 70-80 per cent of F&N’s net profits, based on its results for the fiscal year ended September 30 of last year. F&N’s property portfolio has different business risks and capital requirements than ThaiBev’s beverage business, and provides limited opportunity for ThaiBev to directly and immediately increase its operating cashflow because there are no clear synergistic opportunities between these businesses.
"In addition to these recent developments, TCC has an outstanding mandatory conditional cash offer to buy all of the issued and paid-up ordinary shares of F&N that it does not already own directly or indirectly through ThaiBev. The offer raises additional credit concerns, including the uncertainty of TCC’s motivations and its apparent influence over ThaiBev’s strategic direction and acquisition appetite, and leaves little clarity regarding ThaiBev’s role in the group’s overall strategy, a further credit negative."
