Ratings agency Moody’s has welcomed Sysco’s $3.1bn deal to buy Brakes and put the latter’s rating on review for upgrade because of the debt paid down as part of the deal.
Moody’s said today the transaction will be “credit positive” for Brakes because it will “become a strategic subsidiary of Sysco, which will repay the vast majority of Brakes’ outstanding debt”.
Sysco, a North American peer of has a stronger credit rating of A2 compared to Brakes’ current non-investment grade Caa1 rating.
Moody’s explained: “Brakes will become an important subsidiary of Sysco, contributing around 10% of group’s sales, according to our estimates. Given the strategic nature of the acquisition, we expect Brakes to benefit from the financial strength of the parent company.”
Sysco benefits from excellent liquidity with more than 6x interest coverage, strong credit metrics and a leading market position in North America with revenues that are almost twice that of its chief competitor, US Foods.
Emmanuel Savoye, Assistant Vice President and lead analyst for Brakes at Moody’s, commented:
Moody’s predicts the deal will see “the vast majority” of Brakes’ debt will be repaid, including the repayment of a number of loan instruments that “will considerably reduce the complexity of Brakes’ capital structure”.
Emmanuel Savoye, Assistant Vice President and lead analyst for Brakes at Moody’s, commented: “We expect Brakes to benefit from lower interest expenses and stronger operating cash flows in order to continue investing in its core operations and make acquisitions in the fragmented European food distribution market.”
However, Sysco’s ratings are on review for downgrade given its stronger credit profile before the takeover relative to Brakes.
With the Brakes acquisition, Sysco’s revenues would be around $54bn at year-end 2015 with Brakes contributing around 10% of that total.