CRIF Ratings: Campari’s announced disposal is supportive of Investment Grade rating

On July 24th, 2017 Davide Campari-Milano S.p.A. (‘Campari’ or ‘the group’), rated ‘BBB-/Stable by CRIF Ratings (the ‘Agency’), has announced the disposal of its fully owned subsidiary TJ Carolan & Son Ltd (‘TJ Carolan’) to the US spirits producer Heaven Hill Brands. The transaction closing is expected by August 1st, 2017 for a consideration of USD 165m (or c. EUR 142m equivalent, on a net debt free basis and excluding price adjustments). The price is equivalent to an EV multiple on contribution margin after advertising and promotion expenses (‘CAAP’) of 9x, which CRIF Ratings sees consistent with the recent transactions in the spirits industry. TJ Carolan owns the spirit brands Carolans and Irish Mist that in FY16 generated sales for EUR 34m and a CAAP of EUR 16m, mostly in the US market, with a minimal contribution to consolidated results (c. 2% of FY16 consolidated sales). Along with the brands, the related inventories and fixed assets will also be transferred to the buyer. Furthermore, the parties entered into a multiannual agreement granting Campari the exclusive distribution of the disposed brands outside the US.

According to CRIF Ratings the transaction is consistent with the group’s M&A strategy as it accelerates the debt reduction process, after the acquisition of Société des Produits Marnier Lapostolle S.A. (‘SPML’) completed in June 2016. The total amount of non-core asset disposals between 2016 and 2017 reached EUR 260m, brands sold included: Terruzzi&Puthod, Sella&Mosca and Lapostolle wineries. The cash out to acquire a 79% stake in SPML and the put and call agreement on the remaining 21% of SPML’s capital (due in 2021) caused an increase of Campari Net Debt to EUR 1.26bn at YE16 from EUR 0.87bn at YE15, bringing Campari Net leverage to 3.1x in FY16, compared to 2.3x in FY15, according to CRIF Ratings’ calculation. Albeit increased, CRIF Ratings considers the leverage still commensurate with a low investment grade rating, in light of the group’s satisfactory operating performances and adequate brand and geographic diversification. The group’s size (EUR 1.73bn of consolidated sales) remains smaller than the main global competitors like Diageo (GBP 16bn of sales), Pernod Ricard (EUR 9bn) or Brown Forman (USD 4bn).

CRIF Ratings anticipates for FY17 a healthy free cash flow generation, underpinned by favorable industry trend and ongoing disposals. As a result, the key credit metrics are expected to improve and comfortably fall at YE17 within the triggers set for the assigned rating, including EBITDA and FFO net leverage in the range of 2x-3x and 2.5x-3.5x respectively, FFO interest coverage within 4.5x-6.5x and EBITDA margin in the 20%-25% range.

Whilst operating performances and free cash flow generation are expected to remain solid also over the following years, the Agency highlights that the ongoing consolidation of the global spirits industry could push Campari to resort to mid-sized acquisitions in order to keep pace with the global competitors. If on one hand the external growth strengthens the group’s business profile boosting sales, geographic diversification and market positioning, then on the other hand it absorbs a large part of the free cash flows and could negatively affect the credit metrics. In CRIF Ratings view the execution risk linked to the external growth strategy is mitigated by the management past track record in the execution and integration of the acquired brands. Furthermore, CRIF Ratings notes the group’s discipline in maintaining a sustainable financial structure over the long term, as demonstrated by leverage profile steadily maintained below 3x over the last 10 years (EBITDA net leverage) coupled with the solid liquidity profile and  balanced debt composition between bond and bank debt.

This publication does not announce a rating action on the issuer.


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Lead Analyst

Simone Mirani, Director – Corporate Ratings
Tel.: +39-051.417 6808

Secondary Analysts

Christian De Rose, Rating Analyst – Corporate Ratings
Tel.: +39-0984.460 281

Ilaria Ottoboni, Rating Specialist – Corporate Ratings
Tel.: +39-051.417 5859