|
|
Get Four
|  | JANUARY 28, 2005
 S&P RATINGS NEWS P&G, Gillette: S&P Ratings Outlook Negative Both outfits are on CreditWatch as the merger will boost P&G's debt leverage substantially, weakening credit-protection measures Standard & Poor's Ratings Services placed its ratings on Procter & Gamble (PG ) and Gillette (G ) on CreditWatch with negative implications on Jan. 28. This includes the AA- long-term and A-1+ short-term corporate credit ratings on both companies. As of Sept. 30, 2004, P&G had $21.4 billion of debt, while Gillette had $3.1 billion. The CreditWatch listing is based on the likelihood that P&G's leverage will increase significantly in the near term following the announcement of its plans to acquire Gillette in a stock transaction valued at about $57 billion. P&G will also initiate a debt-financed, stock-repurchase program for up to $22 billion, ultimately funding the transaction with about 60% stock and 40% cash. GEOGRAPHIC DIVERSITY. As a result of the substantial increase in debt leverage, P&G's credit-protection measures will decline over the intermediate term. However, both P&G and Gillette have had very strong operating performance in recent years, as they have boosted operating efficiencies and developed new products that have resulted in significant organic growth. Moreover, P&G maintains strong geographic diversity, with 50% of sales in North America and strong global brands such as Pampers and Tide. The consumer-products giant has also generated more than $7 billion of annual free cash flow during the past two years and maintains significant cash balances. Recent acquisitions include the remaining interest in its joint venture from Hutchison Whampoa China for $1.8 billion in 2004 and Wella AG in 2003 for more than $5 billion. The Gillette acquisition is expected to enhance P&G's business profile. Gillette also has strong geographic diversity, with about 40% its sales in the U.S. and a dominant global market position in the blades and razors category of the male and female grooming segment. Gillette has generated about $2 billion on annual free cash flow over the past two years that has contributed to significantly reduced leverage. BIG REDUCTION UNLIKELY. The addition of the Gillette brand in the grooming category and the Duracell brand in the battery category are expected to further enhance P&G's already strong and diverse brand portfolio. The combined company, which would have over $60 billion in annual sales, is also expected to provide greater scale and leverage with key retailers such as AA-rated Wal-Mart (WMT ). S&P's review will focus primarily on P&G's ultimate capital structure, financial policy, and integration risks in determining the impact to the company's ratings. The ratings could be affirmed if S&P expects P&G's credit-protection measures to return to historic levels over the intermediate term -- if there's no significant integration risk relating to the Gillette acquisition, and if P&G maintains a financial policy consistent with the existing ratings. Upon completion of the review, it's unlikely that the ratings would be lowered more than one notch.  From Standard & Poor's Ratings Services All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2005, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
