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Moody's downgrades Reckitt Benckiser on Mead acquisition leverage

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Staff Writer | June 14, 2017
Reckitt Benckiser
Rating   To A3 from A1

Moody's Investors Service late Tuesday downgraded the long-term issuer rating of consumer goods giant Reckitt Benckiser Group PLC and long-term debt ratings of Reckitt's subsidiary Reckitt Benckiser Treasury Services PLC to A3 from A1.

The ratings agency also downgraded the short-term ratings of Reckitt Benckiser Treasury Services to P-2 from P-1, but said the outlook on all ratings is stable.

Moody's took this action following Reckitt's announcement on Monday that it has received all the regulatory approvals to complete the USD16.7 billion acquisition of baby food maker Mead Johnson Nutrition Co.

It said the downgrade reflects "the significant debt and resulting high leverage" that Reckitt will incur to fund the Mead deal.

Moody's expects Reckitt's leverage pro forma for the acquisition to increase to approximately 4.4 times at December 2017 from 0.9 times for Reckitt on a standalone basis, based on its financial 2016 results.

However, Moody's does expect Reckitt to delever towards 3.0 times by 2019 through a combination of earnings before interest, tax, depreciation and amortisation growth and debt repayments.

"The combined entity will have a stronger geographical footprint and improved segment diversification thanks to the contribution of Mead's core nutrition business. Moody's factors the contribution from Mead on top of RB's mid-single-digit range annual organic growth," Moody's said.

"Moody's also notes that the group could further de-lever in case of disposal of the Food business as the company is exploring different options for the division. If the review concluded with a disposal, RB's leverage would decrease faster than assumed," the ratings agency added.

Moody's added that the acquisition of Mead will entail "a fair degree of execution risk" because of Mead's exposure to product areas in which Reckitt has limited expertise, while Reckitt will also need to address Mead's low organic growth. Mead's underlying sales fell by 3% in 2016.

However, Moody's said it views the execution risks as "manageable", as Reckitt has a large market share in global paediatric consumer health, resulting in some synergies with Mead's baby food business; a strong track record of integrating assets and building operational excellence in the consumer health industry; and a positive track record in generating strong organic growth.

"As a result of the acquisition, the rating agency expects around 14% of the combined entities' total debt to be at Mead's level at the end of 2017, which Moody's deems not to be material enough to create a material subordination for RB's existing lenders," Moody's said.


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