Burns Philp & Co. is relying heavily on debt to finance its bid for the Australian and New Zealand consumer-branded packaged food company, Goodman Fielder, according to Moody's Investors Service. Burns is looking for a A$100 million revolver, a A$1.3 billion "A" term loan, a US$375 million "B" piece and a US$150 million senior subordinated notes issue to fund the A$2.4 billion (US$1.4 billion) unsolicited cash offer for Goodman (LMW, 2/10). Noting the increased leverage as a result of the acquisition, Moody's has assigned a B1 rating to the new credit facility and a B3 rating to the subordinated notes.
Moody's states that pro forma leverage for the potential transaction is estimated to be 4.8 times and de-leveraging would be slow if the company is not able to achieve any cost savings from the integration of Goodman. The rating agency also anticipates that the run-rate free cash flow would be less than 5% of the pro forma debt, constraining the company's ability to pay down debt.
A second notable concern is the integration risks inherent in the acquisition. Goodman's businesses are larger and different than Burns' current global industrial yeast and North American retail consumer spice and yeast operations. Furthermore, Moody's remains concerned with Goodman's financial position because the company's earnings, liabilities and capital needs have been difficult to ascertain at this point.
However, as the largest branded-foods company in Australia and New Zealand, Goodman would bring relatively stable cash flow to the table as well as triple revenues. Burns' operations already posses an element of geographic and customer diversity, but Goodman will diversify operations even further from a product and geographical standpoint. Furthermore, Burns currently has relatively stable cash flow and has maintained operating margins of 21% for the last 12 months. The company commands a lead position in most of its markets and its management has a successful track record in restructuring Burns' existing operations.