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When The Cycle Turns: How Have M&A Transactions In Consumer Products Performed?

(Editor's Note: As the current credit cycle approaches record length, our "When The Cycle Turns" series looks at the impact that a downturn involving deteriorating economic and credit fundamentals--with rising defaults and scarce liquidity--may have on ratings and market conditions. This article is part of the series.)

Over the past several years, consumer products companies (CPGs) have been pursuing mergers and acquisitions (M&A) to respond to minimal revenue growth and increasing competition from new players (see "When The Cycle Turns: Will Consumer Companies' M&A-Related Debt Result In An Exodus From Investment Grade?").

Below, we discuss how specific transactions have performed from a ratings standpoint. The majority of these transactions performed within our initial ratings expectations, despite experiencing industrywide headwinds.

Frequently Asked Questions

Have some acquirers been able to maintain ratings, despite making deals that haven't resulted in expected revenue and earnings growth?

We believe that most CPG companies can deleverage their balance sheets, even if the assets they acquire aren't successful as they expect at the outset of deals--which demonstrates the strength of these companies' cash flows, generally. These include Campbell Soup Co.'s acquisition of Wm. Bolthouse Farms Inc., Conagra Brands Inc.'s purchase of Ralcorp Holdings Inc., The J.M. Smucker Co.'s purchase of Big Heart Pet Brands, and Newell Brands Inc.'s acquisition of Jarden Corp. Here, we outline the cases:

Campbell Soup and Wm. Bolthouse Farms 

Campbell purchased Bolthouse Farms in 2012 for about $1.55 billion, or an EBITDA multiple of about 10x, in order to expand its portfolio into healthier product categories and propel organic revenue growth. Campbell has historically been financially conservative, keeping its leverage around 2x-2.5x, but the Bolthouse transaction increased its leverage to 3x. As a result, we downgraded the company one notch, to 'BBB+' from 'A-', and we expected the company to begin managing leverage at around 3x or higher, believing it would seek additional acquisitions and maintain a slightly more aggressive financial policy. Two years after the Bolthouse transaction, the company was able to reduce leverage to 2.5x. The company continued to make tuck-in acquisitions while keeping leverage below 2.5x, despite anemic top-line growth because of continued declines in the soup category and underperformance of the Bolthouse asset. Bolthouse's profitability has dropped substantially under Campbell's ownership, and we consider this an unsuccessful acquisition. The company wasn't able to generate the growth it had anticipated, but it was able to maintain leverage below 3x absent any other sizable acquisitions because of its strong cash flow. After the deal, the company pulled back on share repurchases to prioritize debt reduction. Currently, the rating is BBB/Negative/A-2, with the most recent downgrade the result of the $6.1 billion acquisition of Snyder's-Lance.

ConAgra Foods and Ralcorp Holdings 

ConAgra purchased Ralcorp Holdings in 2013 for about $6.8 billion, or a nearly 12x EBITDA multiple. The company's strategy was to combine a branded food company with a private-label manufacturer, because the latter was growing faster, and to achieve synergistic opportunities. We didn't raise the business risk profile at the time because of high integration and execution risk, and we lowered the rating one notch, to 'BBB-' from 'BBB'. The company's leverage increased to about 5x pro forma for the deal, from about 2x. The acquisition proved to be unsuccessful, in our view, with profitability declining substantially at the private-label business. Nonetheless, the company was able to reduce leverage to 4x from 5x, and the rating stayed at 'BBB-' despite the company's underperformance and inability to grow EBITDA. The firm still generated a lot of cash flow, reduced share repurchases, and started selling assets. Ultimately, the company sold off many of its noncore assets, including the Ralcorp business and Lamb Weston, reducing debt leverage to about 2x. Management was replaced, and the company now focuses primarily on branded food and has been able to restore some organic growth. We have since raised the ratings to 'BBB' after the asset sales and additional deleveraging.

J.M. Smucker and Big Heart Pet Brands 

Smucker acquired Big Heart in 2015 for about $5.8 billion, or a 14x EBITDA multiple. The acquisition increased Smucker's scale and diversified its portfolio into the faster-growing and more stable pet food category. After the deal, we lowered the rating to 'BBB' from 'BBB+', because leverage increased to about 4x from 2x. We also revised the company's business risk profile to strong from satisfactory, reflecting the company's improved scale and diversification. Smucker repaid debt as planned and reduced leverage to about 3x within 24 months. While we recognize that the pet food portfolio hasn't grown as rapidly as the company expected, Smucker still generates substantial cash flow and maintains leverage between 3x-4x. If the company hadn't made more acquisitions, its leverage would likely approach 3x or below. The rating is still at 'BBB', and the company recently acquired Ainsworth Pet Nutrition.

Newell Brands Inc. and Jarden Corp. 

Newell merged with Jarden Corp. in 2016 for about $20 billion, or a 16.5x EBITDA multiple, as it sought to gain market share through broader distribution platforms, expand its global reach, and strengthen its e-commerce capabilities. At the time, we affirmed the 'BBB-' rating but revised the outlook to negative. Pro forma leverage was about 5x, and we expected the company to reduce leverage to below 4x within two years of the deal's close. The negative outlook reflected a risk of a downgrade if the company wasn't able to reduce leverage as planned. The company prioritized debt reduction, used excess cash flow and asset sales proceeds to reduce debt, and was on a path to deleveraging below 4x by end of last year. We revised the outlook to stable in January 2017. The company's profitability dropped during the second half of last year because of increasing prices for resin, the bankruptcy of Toys "R" Us Inc., and retailers' destocking on inventory. As a result, the company's sales and margins were somewhat weaker than our previous expectations, and the company ended fiscal 2017 with leverage of slightly more than 4x. In January of this year, Newell announced that it planned to sell some of its nonstrategic assets and use a significant portion of the proceeds for debt reduction. The company reiterated its commitments to maintaining an investment-grade rating and deleveraging to about 3x. In February, Starboard Value L.P., an activist hedge fund, aligned with former executives of Jarden Corp. to launch a proxy fight to oust Newell's board and chief executive. On April 23, 2018, Newell entered into a settlement agreement with Starboard to end its proxy contest. The end of the battle with Starboard has reduced uncertainty, in our view, as we now believe that the board is fully committed to the company's deleveraging strategy. With a new board in place, consisting of 12 highly experienced members, and a transformation plan underway, Newell seems well positioned to compete in the market. Under its accelerated plan, which entails selling businesses representing about one-third of its revenues, the company expects to generate about $10 billion of cash proceeds. Management has expressed a strong desire to maintain its investment-grade rating, and we expect it to apply 45% of the asset-sale proceeds to debt reduction and to reduce leverage below 4x this year and reach its target leverage of 3.5x by 2019 through a combination of debt repayment and EBITDA growth. Moreover, we expect the company will reduce its outstanding debt by more than $2.5 billion this year, even if it experiences unexpected performance shortfalls that hurt its margins and EBITDA generation. Newell's transformation plan, once completed, will allow it to simplify operations and focus on the core brands that fit with its strategy to operate as a global branded consumer products company with Nos. 1 or 2 positions in a diverse mix of niche consumer products categories.

Have any of these deals met or exceeded expectations and resulted in ratings improvements?

Several recent M&A deals performed in line with or exceeded our expectations. Here, we discuss some of these acquisitions, including Tyson Foods Inc.'s purchase of The Hillshire Brands Co., the merger of Kraft Foods and H.J. Heinz, Danone SA's purchase of The WhiteWave Foods Co., and McCormick & Co. Inc.'s acquisition of the food division of Reckitt Benckiser Group plc.

Tyson Foods and Hillshire Brands 

Tyson purchased Hillshire in 2014 for nearly $9 billion, or about an 18x EBITDA multiple, expanding Tyson's portfolio into packaged meats and noncommodity categories that are faster growing with higher margins. We affirmed the 'BBB' rating but revised the outlook to negative from stable, as leverage increased to nearly 3.5x from about 1x. However, given Tyson's strong cash flow and synergies from the acquisition, we felt confident that the company could reduce leverage to below 3x within two years of the deal's close. The acquisition proved to be successful, as Tyson was able to integrate Hillshire effectively, with cost savings exceeding expectations, and the company was able to deleverage. The company remains very acquisitive, but, with the increased scale from the Hillshire acquisition, its recent acquisitions have required it to take on less debt. Last year, it acquired Advance Pierre Foods, further expanding its position in the food service channel while not taking pro forma leverage above 3x. Similarly, its pending 2018 acquisitions of American Proteins, AMPRO products, and organic chicken producer Smart Chicken will not push leverage above 3x. We now rate the company 'BBB' with a positive outlook. The outlook revision to positive reflects Tyson's improved business mix following a string of acquisitions in the past several years and its disciplined approach to managing leverage while continuing to make acquisitions.

Kraft Foods and H.J. Heinz 

H.J. Heinz and Kraft Foods merged in a roughly $55 billion transaction in 2015, creating the third-largest North American packaged food company--transforming industry dynamics and putting pressure on other large packaged food companies to cut costs and decrease excess manufacturing capacity. 3G Capital executed its zero-based budgeting principles to drive more than $1.5 billion in cost savings, resulting in an industry-leading EBITDA margin of nearly 30% within two years. The company committed to trimming more than $2 billion from debt and not initiating a share-repurchase program for at least two years. We rated the combined company, The Kraft Heinz Foods Co., 'BBB-' with a positive outlook. The rating reflected pro forma leverage of about 5x and our expectation that it would decline to below 4x within two years after the deal closed. The positive outlook reflected our belief that we could raise the rating if the company meets or exceeds our base-case forecast. Kraft Heinz delivered on its commitment to reduce debt and increase EBITDA margin growth. We recognize that top-line revenue growth has lagged the original plan, but cash flows and deleveraging were in line with our expectations. We subsequently revised the outlook to stable upon the potential acquisition of Unilever--but the transaction didn't happen. We recently raised the rating to 'BBB' from 'BBB-', reflecting the company's deleveraging, strong cash flow generation, and leading industry margins--despite our expectation that another acquisition is likely. The timing and size of a potential large-scale transaction is unknown.

Danone and WhiteWave 

Food and beverage group Danone purchased U.S.-domiciled plant-based food and beverage company, WhiteWave Foods (WWV) for $12.5 billion in April 2017. The deal was entirely debt funded, which prompted us to downgrade Danone by one notch to 'BBB+' because of the sharp increase in debt in the capital structure. WWV's business fits well with Danone's strong global positions in fresh dairy products. Plant-based products are growing above most packaged food categories in North America just as Danone is seeing continued volume decline in yogurt in Europe and North America. WWV's products benefit from premium pricing compared with mainstream food at a time of strong price pressure from private label in fresh dairy. The integration in the group has been on track, and the large production and distribution scale of Danone supports increased market share and penetration in North America and Europe. In February 2018, we revised the outlook of Danone to stable from negative following improved credit measures. The company made an €1.3 billion of debt repayment from the sale of stake in Japanese yogurt maker Yakult, the board proposed a scrip dividend (in shares) for 2018, and the company issued an €1.25 billion hybrid bond (50% equity, 50% debt), which funded the redemption of WWV's senior bonds. We also forecast stable annual free cash flows of about €2.0 billion to 2.2 billion. As a result, we forecast the company will deleverage faster than expected, closer to 3.3x in 2018 and 3.0x in 2019.

McCormick & Co. Inc. and Reckitt Benckiser Group's Food Division 

McCormick acquired the food division of Reckitt Benckiser for $4.2 billion in middle of last year. The acquisition added the French's, Frank's RedHot, and Cattleman brands, significantly enhancing McCormick's market share in the sauces/condiments category. At the close of the transaction, we lowered the corporate credit rating two notches, to 'BBB', and affirmed the 'A-2' short-term and commercial paper rating. The downgrade reflected higher leverage near 5x, which is significantly above the 2x the company previously maintained. The firm has managed the balance sheet more conservatively in the past, and we expect it to prioritize debt repayment over shareholder-friendly activities for the next few years. In addition, the company funded the transaction with a combination of equity and prepayable debt, demonstrating its commitment to leverage reduction. As of May, the company had repaid about $400 million of debt, and we expect it to deleverage to below 4x by the end of fiscal 2019.

Consumer Products M&A Transactions
--Leverage (x)-- --Acquirer BRP--
M&A announced date M&A closed date Est. enterprise value (mil. US$) Est. purchase price multiple (x) Acquirer pre-acq rating Acquirer post-acq rating Acquirer current rating* Pre-acq Pro forma at close Year 2§ Acquirer % debt financing Pre-acq Post-acq
Acquirer: Conagra Brands Inc.; Target: Pinnacle Foods Inc.
06/26/2018 Pending 11,000.0 16.1 BBB/Stable/A-2 BBB/Negative/A-2 BBB/Negative/A-2

3

5.0 4.1 73.3 Satisfactory Strong
Acquirer: General Mills Inc.; Target: Blue Buffalo Pet Products Inc.
02/23/2018 04/24/2018 8,000.0 25.0 BBB+/Stable/A-2 BBB/Stable/A-2 BBB/Stable/A-2 3.2 4.5 3.7 85.0 Strong Strong
Acquirer: Keurig Green Mountain Inc.; Target: Dr Pepper Snapple Group Inc.
01/29/2018 07/10/2018

30,131.5

Merger BB+/Stable/-- BBB/Stable/A-2 BBB/Stable/A-2 KGM: 2.9x DPS: 2.8x 5.8 3.5

85

KGM: Fair DPS: Strong Strong
Acquirer: Bacardi Limited; Target: Patron Spirits International
01/22/2018 04/30/2018 3,700.0 19.5 BBB+/Stable/A-2 BBB-/Stable/A-3 BBB-/Stable/A-3 2.5 5.1 4.0 100.0 Strong Strong
Acquirer: Campbell Soup Co.; Target: Snyder's-Lance Inc.
12/18/2017 03/26/2018 6,100.0 20.0 BBB+/Stable/A-2 BBB/Negative/A-2 BBB/Negative/A-2 2.3 4.9 3.8 100.0 Strong Strong
Acquirer: McCormick & Co. Inc.; Target: Reckitt Benckiser Group's food division
07/10/2017 08/17/2017 4,200.0 19.5 A-/Stable/A-2 BBB/Stable/A-2 BBB/Stable/A-2 2.2 5.3 3.5-4 89.0 Strong Strong
Acquirer: Reckitt Benckiser Group PLC; Target: Mead Johnson Nutrition Co.
02/10/2017 06/15/2017 17,900.0 17.4 A+/Stable/A-1 A-/Stable/A-2 A-/Stable/A-2 0.7 4.1 3.7 100 Excellent Excellent
Acquirer: Danone SA; Target: WhiteWave Foods Co.
11/07/2016 04/12/2017 12,500.0 27.8 A-/Negative/A-2 BBB+/Negative/A-2 BBB+/Stable/A-2 2.1 4.5 3.4

100

Strong Strong
Acquirer: Newell Brands Inc.; Target: Jarden Corp.
12/14/2015 04/15/2016 20,100.0 16.5 BBB-/Stable/A-3 BBB-/Negative/A-3 BBB-/Stable/A-3

3.5

5.0 3.7 58 Satisfactory Satisfactory
Acquirer: Molson Coors Brewing Co.; Target: Miller Coors
11/11/2015 10/11/2016 12,200.0 12.2 BBB+/Stable/A-2 BBB-/Stable/A-3 BBB-/Stable/A-3 2.0 5.3 4.2 79 Satisfactory Strong
Acquirer: H.J. Heinz Co.; Target: Kraft Foods Group Inc.
03/25/2015 07/02/2015 55,000.0 Merger Kraft Foods: BBB/Stable/A-2 Heinz: BB-/Stable BBB-/Positive BBB/Stable/A-2 Kraft Foods: 3.4x Heinz: 7x (excl pref. stock) 5.2 3.5

52.0

Kraft Foods: Strong Heinz: Strong Strong
Acquirer: J.M. Smucker Co.; Target: Big Heart Pet Brands
02/03/2015 03/23/2015 5,800.0 14.4 BBB+/Stable BBB/Stable BBB/Stable/A-2 2.0 4.0 3.0 67.2 Satisfactory Strong
Acquirer: Tyson Foods Inc.; Target: The Hillshire Brands Company
05/29/2014 08/28/2014 8,932.1 18.3 BBB/Stable/-- BBB/Negative/-- BBB/Positive/A-2 1.0 3.5 2.0

73

Satisfactory Satisfactory
Acquirer: ConAgra Foods Inc.; Target: Ralcorp Holdings Inc.
11/27/2012 01/29/2013 6,800.0 11.8 BBB/Stable/A-2 BBB-/Stable/A-3 BBB/Negative/A-2 2.2 5.0 3.5 96.0 Satisfactory Satisfactory
Acquirer: Campbell Soup Co.; Target: Wm. Bolthouse Farms Inc.
07/09/2012 08/06/2012 1,550.0 10.0 A-/Stable/A-2 BBB+/Stable/A-2 BBB/Negative/A-2 2.1 3.0 2.5 100.0 Strong Strong
*As of July 23, 2018. §Expected year two leverage. BRP--Business risk profile. Sources: S&P Capital IQ and S&P Global Ratings estimates.

This report does not constitute a rating action.

Primary Credit Analysts:Bea Y Chiem, San Francisco (1) 415-371-5070;
bea.chiem@spglobal.com
Diane M Shand, New York (1) 212-438-7860;
diane.shand@spglobal.com
Secondary Contacts:Mariola Borysiak, New York (1) 212-438-7839;
mariola.borysiak@spglobal.com
Barbara Castellano, Milan (39) 02-72111-253;
barbara.castellano@spglobal.com
Chris Johnson, CFA, New York (1) 212-438-1433;
chris.johnson@spglobal.com
Amanda C O'Neill, New York + (212) 438-5450;
amanda.oneill@spglobal.com
Gerald T Phelan, CFA, Chicago (1) 312-233-7031;
gerald.phelan@spglobal.com
Maxime Puget, London (44) 20-7176-7239;
maxime.puget@spglobal.com
Research Contributor:Ayyappa Ramakrishna, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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