MELBOURNE (S&P Global Ratings) Feb. 24, 2021--Australia-based Woolworths Group Ltd. (BBB/Stable/A-2) is well-placed to deal with the complexities around its plan to separate its drinks business, S&P Global Ratings said today, although the reduction in the group's scale and diversity could weigh on credit quality. Woolworths has re-affirmed its intention to separate the high-margin liquor and hotel business, Endeavour Group (EG), with an estimated completion in mid calendar 2021. Post separation, we will seek to understand the ongoing linkages with EG and the resulting impact on Woolworths earnings profile. In addition, Woolworths future capital structure, including total operating lease obligations, and management's financial stance will frame our assessment of its credit quality following the separation of EG.
In our view, the remaining business will be affected by the reduction in the group's scale and diversity and could impact its credit strength. While Woolworths has yet to articulate a post-separation capital stance, we note management's commitment to a solid investment grade rating. EG accounted for around 24% of group EBITDA during the first half of fiscal 2021. EG will separate from Woolworths through either a demerger or value accretive alternative, after the completion of an internal restructure and merger of Endeavour Drinks and Australian Leisure and Hospitality Group, which formed EG in fiscal 2020.
Woolworths' current credit metrics have considerable rating headroom. However, given the uncertainty surrounding the company's capital structure following the separation of EG, we do not expect any upward rating pressure at this time. Post-separation, following the loss of EG earnings, we will look to Woolworths financial policies and resultant credit metrics that would be supportive of the current 'BBB' rating.
We note the group's Australian and New Zealand food and discount department store businesses benefitted from the home consumption surge during the first half of fiscal 2021, as consumers' social movements remained somewhat restricted.
In our view, the proposed investment stake in Australia's second-largest food service distributor, PFD Food Services (PFD), extends the group's exposure across the food sector. We expect Woolworths' credit metrics can comfortably accommodate the A$552 million proposed transaction to acquire a 65% equity interest in PFD. However, the transaction remains subject to Australian Competition and Consumer Commission approval, with a decision expected in April 2021.
This report does not constitute a rating action.
AUSTRALIA
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| Primary Credit Analyst: | Sam Playfair, Melbourne + 61 3 9631 2112; sam.playfair@spglobal.com |
| Secondary Contact: | Craig W Parker, Melbourne + 61 3 9631 2073; craig.parker@spglobal.com |
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