Weak profits threaten Kellogg debt reduction plan
May 1, 2012
NEW YORK — A Kellogg Co. plan to reduce overall debt levels over the next two years “may be impeded by its current operational challenges,” according to Fitch Ratings.
Fitch on May 1 removed Kellogg from its rating negative watch list, affirmed its credit ratings and gave the company a negative rating outlook. With the affirmation, Kellogg retains its BBB+ long-term issuer default rating.
Kellogg had been placed on the Fitch rating watch negative list Feb. 15 in connection with its planned acquisition of the Procter & Gamble’s Pringles business for about $2.7 billion. The acquisition is expected to close by the end of June, pending regulatory approval.
Fitch said Kellogg will finance the acquisitions with new debt issuance, together with some portion of the company’s $405 million in liquid assets.
“Pringles will significantly enhance Kellogg’s existing snacks business, which is primarily in North America, and provide it with a stronger platform for product and geographic expansion,” Fitch said.
While Fitch said its rating affirmation reflects the view that Kellogg profits could help reduce debt levels to pre-acquisition levels within two years, the negative outlook underscores the possibility that the operating environment, the Pringles integration and reinvestment in the Kellogg supply chain could impede the plans.
“These factors are compounded by persistently high commodity inflation with 7% inflation anticipated in 2012, macroeconomic uncertainty and some consumer resistance to recent food price increases,” the agency said.
Offering examples of what could trigger a downgrade, Fitch said operating performance that “substantially deteriorates” from current expectations (recently revised downward) or if debt reduction is slower than anticipated, resulting at leverage at or near 3 times EBITDA.