Cott Corp. Put On Watch Negative, DS Services of America Inc.'s Secured Notes Put On Watch Positive On Potential Buyout
- Tampa-based Cott Corp. announced that it has entered into a definitive merger agreement to acquire DSS Group Inc. (parent of DS Services of America Inc.) for about US$1.25 billion.
- Upon completion, the proposed acquisition will increase Cott's debt obligations, which would materially weaken the company's credit protection measures.
- As a result, we are placing our ratings on Cott, including our 'B+' long-term corporate credit rating, on CreditWatch with negative implications.
- At the same time, we are placing our 'B-' issue-level rating on DS Services of America's senior secured notes on CreditWatch with positive implications.
NEW YORK (Standard & Poor's) Nov. 6, 2014--Standard & Poor's Ratings Services today said it placed its ratings, including its 'B+' long-term corporate credit rating, on Tampa-based Cott Corp. on CreditWatch with negative implications. At the same time, Standard & Poor's placed its 'B-' issue-level rating on Atlanta, Ga.-based DS Services of America Inc.'s (DS Services) senior secured notes on CreditWatch with positive implications. "Our CreditWatch negative placement on Cott follows the company's announcement that it has entered into a definitive merger agreement to acquire DSS Group Inc., parent to DS Services, from Crestview Partners for about US$1.25 billion," said Standard & Poor's credit analyst Lori Harris. We believe the acquisition will be financed with a combination of debt and preferred shares, resulting in a material weakening of Cott's credit measures. "The CreditWatch positive placement on DS Services' senior secured debt reflects the notes favorable position in Cott's expected capital structure, resulting in the likelihood that we will raise the rating once the acquisition is complete," Ms. Harris added. Standard & Poor's other ratings on DS Services, including its 'B' long-term corporate credit rating, are unchanged. Standard & Poor's expects the US$1.25 billion purchase price to be financed with US$600 million of proposed senior unsecured notes, US$350 million of assumed DS Services senior secured notes due 2021, US$150 million of proposed preferred shares, and a drawdown of the asset-backed lending facility, which Cott plans to increase to US$400 million from US$300 million. We expect the acquisition to close within the next few months on certain approvals. Standard & Poor's believes that Cott's financial risk profile will no longer be in line with its "significant" assessment. Given that the acquisition will be financed with debt and preferred shares (which we treat as debt), completion of the transaction will significantly weaken credit protection measures on a pro forma basis. However, the acquisition of DS Services should enhance Cott's business risk profile, which is "vulnerable" at present, as the company will benefit in the areas of revenue growth, margins, and diversification by product and customer. This acquisition gives Cott an immediate entrance into the growing U.S. water and coffee direct-to-consumer delivery segment and water filtration segment, while providing some cost-saving opportunities. Still, DS Services represents a very large transaction for Cott as it increases the company's revenue by about 45% to US$3 billion on a pro forma basis, which adds integration risk. Resolution of the CreditWatch placements will depend on the transaction closing in line with our expectations and the company obtaining the necessary approvals. Upon closing, Standard & Poor's expects it will likely downgrade Cott by one notch given the weakening of credit protection measures, and assign a stable outlook. We also expect to lower our rating on Cott's US$525 million senior unsecured notes to 'B-', one notch below our long-term corporate credit rating on Cott, from 'B+'. We would also revise the recovery rating on the debt to '5' from '4'. A '5' recovery rating indicates our view that lenders could expect modest recovery in the event of default. The one-notch distinction between the corporate credit rating and the unsecured notes would reflect our expectation that a large amount of priority secured debt would weaken the unsecured noteholders' prospects for recovery in default. We would likely raise our issue rating on DS Services' US$350 million senior secured notes two notches above the corporate credit rating to 'BB-' from 'B-', and revise our recovery rating on the debt to '1' from '5'; a '1' recovery rating indicates our view that lenders can expect very high recovery in a default scenario. RELATED CRITERIA AND RESEARCH Related Criteria
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Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | Lori A Harris, Toronto 416-507-2546; lori.harris@standardandpoors.com |
| Secondary Contact: | Rick R Joy, New York (1) 212-438-1310; rick.joy@standardandpoors.com |
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