Land O'Lakes will carry significantly higher debt and have weaker debt protection measures following its acquisition of Purina Mills, putting pressure on the company's new $375 million senior secured bank deal. Moody's Investors Service assigned a Ba2 rating to the new credit. Land O'Lakes is paying $243 million for Purina and is also taking on $120 million in Purina Mills debt. Peter Abdill, senior credit officer at Moody's, said timing was an issue for Land O'Lakes. "Land O'Lakes did [the acquisition] at a difficult time in the agriculture cycle," said "Sometimes an acquisition in a downturn is the right thing to do; you can buy on the cheap. But they did it at a bad time in their business life." Land O'Lakes, based in Arden Hills, Minn., is a branded dairy food and agricultural supply cooperative.
Abdill said the acquisition weakens the company's debt protection measures, creating approximately $380 million in incremental debt a 46% increase. The company also has trust preferred securities bringing total debt to $1.26 billion and its support of certain leasing arrangements for one of its joint ventures adds even more leverage. Security for the deal consists of a first priority interest in the company's equity interest in subsidiaries and joint ventures, loans to those entities, and substantially all other tangible and intangible assets of the borrower and each guarantor. Abdill notes that there is adequate coverage for senior secured debt.
Abdill said the company faces significant refinancing needs since a $75 million bridge loan comes due in six months, with an additional $250 million in bank debt maturing in 18 months. "What comes due in six months is a small part of their capital structure, and we think they'll go out and replace the financing. Until it's done, it's out there and it's right for us to raise these risks."
A plus for the credit is potential for new profit, according to Abdill. "There's some geographic territories that Purina is in that Land O'Lakes is not," said Abdill. "People know the Purina brand. This industry has a lot of overcapacity. The ability of two players to get together and reduce the number of players can be a positive thing." Abdill describes the acquisition as strategic because it adds higher margin product lines, geographic territories, and well known feed brands.