May 23, 2017 / 4:12 PM / in 6 months

Fitch Rates Tyson's Senior Notes Offering 'BBB'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, May 23 (Fitch) Fitch Ratings has assigned a 'BBB' rating to Tyson Foods,Inc.'s (Tyson; NYSE: TSN) benchmark issuance of senior unsecured notes that Fitch anticipates will approximate around $2.5 billion in aggregate. The Rating Outlook is Stable. A full list of Tyson's ratings follows at the end of this press release. Proceeds from the senior notes offering form part of the financing for the $4.2 billion acquisition of AdvancePierre Foods Holdings, Inc. (AdvancePierre; NYSE:APFH) expected to close by the end of June. Tyson previously indicated that acquisition financing would consist of a mix of term loans, senior notes, commercial paper, and cash on hand. The new debt is expected to rank pari passu with Tyson's existing debt. At April 1, 2017, Tyson had approximately $6.4 billion of debt, consisting mainly of senior unsecured notes maturing 2018 through 2044. On May 17, 2017, Tyson announced the issuance of a $1.8 billion three-year senior unsecured delayed-draw term loan and replaced its existing $1.25 billion revolver that expires September 2019 with a new $1.5 billion five-year senior unsecured revolver. Total debt and total debt-to-EBITDA pro forma for the acquisition of AdvancePierre will approximate $10.5 billion and 2.7x, respectively. KEY RATING DRIVERS Acquisition of AdvancePierre: Fitch views the acquisition as complementary with minimal integration risk. The $4.2 billion purchase price represents 14x AdvancePierre's $300 million of EBITDA and 2.6x its $1.6 billion of sales for 2016. However, Tyson is targeting a $200 million run rate of annual synergies within three years of transaction closing. A consolidated manufacturing footprint, procurement efficiencies, distribution network consolidation, and the elimination of redundant sales and marketing functions and duplicative corporate overhead will create cost savings. Fitch views the acquisition as consistent with Tyson's strategy of transitioning from a commodity meat and poultry processor to a higher margin protein-packed foods firm and as complementary given Tyson's limited exposure to value-added lunch/dinner protein sandwich products for which AdvancePierre is a leader. Synergies are viewed as achievable and integration risk as minimal given Tyson's track record with the 2014 purchase of The Hillshire Brands Co., which was more than two times the size of AdvancePierre based on sales. Significant Scale and Diversification: Tyson's ratings benefit from its significant scale with LTM (April) sales of $36.8 billion and EBITDA of $3.7 billion, leading position in U.S. protein, and product diversification that includes a growing portfolio of branded packaged food and value-added products. Tyson is one of the world's leading food companies with No. 1 and No. 2 share in large and growing protein categories such as frozen breakfast and smoked sausage under the Jimmy Dean and Hillshire brands. For the year ended Oct. 1, 2016, segment contribution to sales and operating earnings was as follows: Chicken (29% and 46%), Beef (38% and 12%), Pork (13% and 19%), Prepared Foods (19% and 26%), and Other which consists mainly of foreign operations (1% and negative 3%). Fitch expects the acquisition of AdvancePierre to increase the Prepared Foods segment's contribution to sales and operating earnings to nearly 25% and 30% respectively. Structural Changes, Prepared Foods Volume Trends: Structural changes have enhanced Tyson's margins and are providing increased earnings stability. Changes implemented over the past several years include improved operating efficiency and closure of inefficient processing facilities. Moreover, Tyson has de-risked its operations by utilizing more short-term and fewer fixed-price customer contracts and by instituting a more disciplined risk management strategy. Tyson has also increased its percentage of value-added and prepared food products, which offer higher margins and more stable cash flow than commodity proteins due to less price volatility. However, value-added and branded packaged foods are susceptible to volume pressures as consumer preferences change. Prepared foods volume was flat for the six-month period ended April 1, 2017, with softness due to declines in foodservice, after declining 2.8% in fiscal 2016 due in part to an extra week in 2015, a voluntary volume reduction in lower margin categories at retail, and slower than planned price reduction on retail shelves. Core volume growth at AdvancePierre was 2.3% in the year ended Dec.31, 2016. Fitch views 1% to 2% volume growth as realistic over the long term assuming ongoing innovation and marketing support. Favorable Operating Outlook: Fitch expects Tyson's operating performances to remain strong for fiscal 2017 and fiscal 2018 due to the continuation of favorable industry fundamentals including low grain costs, ample livestock supply, steady global demand, and effective margin management in non-vertically integrated beef and pork operations. Results will also continue to benefit from the realization of a targeted $700 million of annual synergies related to the Hillshire acquisition by fiscal 2018. Synergies, from operational improvements, manufacturing, procurement, logistics, and organizational duplication, have approximated $640 million to date, and should be sustainable over the long term. As mentioned previously, Tyson is targeting $200 million of annualized synergies from AdvancePierre by 2020. Normalized Margins, Modest Volatility: Tyson's sales and earnings are subject to periodic volatility caused by changes in input costs and protein prices due to supply/demand dynamics of commodity products. However, risk is partially mitigated by the company's operating efficiency and diversification in chicken, beef, pork, and prepared foods products. Tyson's views normalized operating margins for its segments to be as follows: Prepared Foods (10% to 12%), Chicken (9% to 11%), Pork (6% to 8%), and Beef (1.5% to 3%). During the quarter, ended April 1, 2017, the Prepared Foods and Chicken segments both performed below the normalized range due in part to lower volumes caused by fires at two chicken plants and weakness in foodservice within prepared foods. Higher marketing, advertising, and promotional spending also contributed. The operating margin for the Prepared Foods segment was 7.9%, excluding a $52 million impairment charge, and for the Chicken segment was 8.3%. Margins in the Pork and Beef segments were above their normalized range at 10.8% and 3.6%, respectively. Tyson's consolidated operating margin was 6.3%, down from 7.7% in the comparable quarter last year. Fitch expects performance in Tyson's higher margin Prepared Foods and Chicken segments to drive future growth. Disciplined Financial and Acquisition Strategy: Tyson maintains a conservative financial strategy, targeting net debt-to-EBITDA of 1.5x to 2.0x over time (which approximates gross debt-to-EBITDA in the high-1x to low-2x range assuming cash of $200 million to $300 million). The company also strives to maintain overall liquidity of at least $1 billion. For the LTM ended April 1, 2017, total debt-to-EBITDA was 1.7x, down from 4.3x at the end of fiscal 2014 following the acquisition of Hillshire, and FCF was $1.5 billion. The decline has been due to cash flow growth, significant synergy capture, and debt reduction. As seen by the pending acquisition of AdvancePierre, Tyson has remained open to strategic M&A, particularly of companies with value-added and branded protein related products, even though organic growth continues to be an important driver of sales and operating earnings. Nonetheless, the company remains committed to maintaining a strong balance sheet by using cash flow to deleverage following debt-financed deals. Following the acquisition of AdvancePierre, Tyson expects to pull back on share repurchases and use FCF and divestiture proceeds to return leverage back to its targeted 1.5x-2.0x as quickly as possible. Fitch views this as possible within two years of acquisition closing. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Tyson's fiscal years include: --Consolidated revenue increases at a low single-digit rate in 2017 and 2018 reflecting lower sales prices and the acquisition of APFH; --Operating margins for each of Tyson's business segments are at or above the normalized range in 2017 and 2018 reflecting continued strong demand and low or manageable commodity input prices; --Consolidated EBITDA of about $3.8 billion in 2017 and $4.1 billion in 2018 reflecting the acquisition of APFH and continue strong operating fundamentals; --FCF averaging $1 billion in 2017 and 2018, with the majority deployed towards debt reduction in 2018; --Total debt-to-EBITDA of approximately 2.8x in 2017 and 2.2x in 2018. RATING SENSITIVITIES Positive Triggers: Continued progress transitioning towards a protein-centric packaged foods company as exhibited by reduced volatility in operating earnings and better than expected volume trends in the Prepared Foods segment would be positive. The ability to sustain normalized consolidated EBIT margins above 6% to 7% while maintaining total debt-to-EBITDA below 2x, and an FCF margin of over 2.5% (more than $1 billion annually) would be key indicators of continued progress. Negative Triggers: A sustained period of total debt-to-EBITDA above 2.5x due to sluggish earnings growth, slower than expected debt reduction following the APFH acquisition, or a change in financial policy would result in a negative rating action. Worsening industry fundamentals caused by meaningfully higher feed costs or a prolonged protein supply/demand imbalance would be leading indicators of a potential downturn in earnings. A sustained loss of market share in branded packaged meats would be of concern. LIQUIDITY Fitch views Tyson's liquidity as ample. Good FCF generation, revolver availability, and the maintenance of a moderate cash balance support liquidity. At April 1, 2017, Tyson had $985 million of liquidity consisting of $246 million of cash and short-term investments and $739 million available under its former $1.25 billion revolver after considering $500 million of outstanding commercial paper and $8 million of letters of credit. In May 2017, Tyson replaced its $1.25 billion revolver maturing on Sept. 25, 2019 with the new $1.5 billion five-year revolving facility discussed above. Financial maintenance covenants for Tyson's revolver and term loan include a maximum debt-to-capitalization ratio of 60% and minimum EBITDA-to-interest ratio of 3.75x. As of April 1, 2017, maturities of long-term debt over the next three years include $120 million of 7% notes due May 2018, a $500 million term loan due April 2019, a $552 million term loan due August 2019, and $1 billion of 2.65% notes due August 2019. FULL LIST OF RATING ACTIONS Fitch currently rates Tyson and The Hillshire Brands Co. - its wholly owned subsidiary as follows: Tyson Foods, Inc. (Parent) --Long-Term Issuer Default Rating (IDR) 'BBB'; --Unsecured bank credit facilities 'BBB'; --Senior unsecured notes 'BBB'; --Short-Term IDR 'F2'. The Hillshire Brands Co. (Operating Subsidiary) --Long-Term IDR 'BBB'; --Senior unsecured notes 'BBB'. The Rating Outlook is Stable. Contact: Primary Analyst Carla Norfleet Taylor, CFA Senior Director +1-312-368-3195 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Bill Densmore Senior Director +1-312-368-3125 Committee Chairperson Philip W. Smyth, CFA Senior Director +1-212-908-0531 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Date of Relevant Rating Committee: April 25, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity are disclosed below: --Historical and projected EBITDA is adjusted to add back noncash stock-based compensation expense and one-time expenses as reported in financials. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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