‘Uncertainty over successful execution sale’ of Saint-Gobain’s Verallia France

It believes the intention to sell the glass packaging business (Verallia) is ‘slightly positive’ to Saint-Gobain's credit risk profile though it is likely to have limited impact on credit metrics.

Relatively stable and profitable business

“The sale of Verallia which has been a relatively stable and profitable business would result in the deconsolidation of its profit contribution (including EBITDA) and depending on the amount of debt reduction might have a marginally positive or negative impact on Saint-Gobain's leverage (debt/Ebitda) that is deemed not to be material for the rating of Saint-Gobain​,” said Falk Frey, senior VP/lead analyst, Moody's.

“The sale process has not yet started and uncertainty on the successful execution remains​.”

Saint-Gobain announced the purchase of Schenker Winkler Holding, the owner of 16.1% of Sika's capital and 52.4% of its voting rights for CHF 2.75bn (approximately € 2.3bn) recently.

Sika is a specialty chemicals company in the development and production of systems and products for bonding, sealing, damping, reinforcing and protecting in the building sector and the motor vehicle industry.

It has subsidiaries in 84 countries around the world and manufactures in over 160 factories thereby extending the international footprint of Saint-Gobain and creating some synergy potential going forward. Its more than 16,000 employees generated annual sales of CHF 5.14 billion (EUR 4.3 billion) in FY2013.

Moody's understands that Saint-Gobain has no intention to launch an offer for Sika's remaining shares nor purchase additional shares in the market and has given the firm a Baa2 long-term and Prime-2 short term rating.

“Although Saint-Gobain will have control over Sika given the majority of voting rights and will fully consolidate Sika in its accounts it will only have access to the cash flow from the 16% of the dividend payout received from Sika​,” added Frey.

“Consequently, its consolidated accounts and financial metrics are somewhat distorted by the high share of third party interests which is only reflected in the net income but not in EBITDA or EBIT figures​.”

Weak rating positioning

According to Moody’s, Saint-Gobain reported €3.3bn of cash and marketable securities on balance sheet at end of June 2014 and €4bn availability under its revolving credit facilities (two tranches: €2.5bn and €1.5bn, both maturing in December 2018).

“Alongside the group's operating cash flow generation before working capital, this should be largely sufficient to cover the cash needs of the group over the next 12 months, even including the €2.3bn of cash out for the purchase of the stake in Sika​,” added Frey.

“Other cash needs mainly consist of working capital and working cash requirements, dividend payments, non-discretionary capital expenditure and approximately €2.0bn of short-term debt maturities (including commercial papers).​

“In addition, Saint-Gobain has a well spread maturity profile and has maintained good access to the debt capital markets even at times of elevated market volatility​.”

He said Sika's product offer is very complementary to the product range of Saint-Gobain and could offer additional synergy potential. However, the ownership structure might turn out to be a limitation in the capacity to create synergies to the extent identified by Saint-Gobain i.e. €100m by 2017 and €180m by 2019.

Despite the currently weak rating positioning, the outlook remains stable. It reflects Moody's expectation that Saint-Gobain will improve its operating performance and financial metrics in 2014 and beyond, exemplified by RCF/net debt to remain at approximately 20% over the next two to three years, with 19% per FY 2013 and 18.5% per LTM June 2014 (impacted by the seasonal working capital peak, expected to recover for FY2014) which leaves little headroom for weaker-than-expected performance; debt/EBITDA levels declining below 4.0x in the

current fiscal year (3.9x per LTM June 2014), driven by improvements in EBITDA and slight reduction in gross debt as well as interest coverage EBIT/Interest expense remaining above 2.5x (3.0x per LTM June 2014).

The stable outlook also assumes that Saint-Gobain will maintain financial discipline with regards to balancing shareholders' and bondholders interest in a way that would protect any deterioration of its currently weak financial metrics within the Baa2 rating category.