Cott Corp. (COT) Ratings Affirmed by Moody's Amid DS Services of America Acquisition News

Moody's Investors Service today affirmed Cott Corporation's (NYSE: COT) ratings, including the company's B2 Corporate Family Rating, the B2-PD Probability of Default Rating, and the B3 rating on its existing $525 million senior unsecured debt, following the announcement that it has entered into a definitive agreement to acquire DS Services of America, Inc. ("DSSA" or "DSW") in a deal valued at approximately $1.25 billion, including the assumption of a portion of DSSA's debt. DSSA is a leading provider of water and coffee delivery services to US homes and offices. Moody's expects the transaction to close in the first quarter of fiscal 2015. The rating outlook is stable. Please see Moody's separate press release on DSSA (CFR B2, stable).

RATINGS RATIONALE

Cott's B2 Corporate Family Rating reflects its increased post-acquisition leverage, with debt/EBITDA (including Moody's standard adjustments) at or slightly above 5 times at closing, and its limited market share and pricing power in the broader beverage industry dominated by Coca-Cola and PepsiCo. The company's customer concentration, while improved post transaction, will still be significant, and Cott is exposed to long-term declining volume trends in the carbonated soft drinks and juice categories. These credit negatives are mitigated by the combined company's larger scale, better product and customer diversification, positive free cash flow, and its position as the largest private label beverage producer and a leading home and office water delivery provider in North America. The rating recognizes the benefits of DS Services of America's strong market position in the fragmented US home and office delivery (HOD) market, its portfolio of recognizable regional brands, and relatively high barriers to new competition. At the same time, DSSA is exposed to potentially volatile resin costs and to macroeconomic variables, most notably employment rates.

The acquisition is transformational for Cott, taking it into an entirely new business, which presents certain new risks and challenges, but also provides for much needed diversification given the negative long term trends in its core business. Moody's expects the company to pay off its preferred shares relatively soon, given their high and escalating coupon, and to then apply cash to reducing ABL borrowings. For this reason, the preferred shares, while having many equity-like characteristics, were considered to be more debt-like than equity-like for purposes of calculating leverage. Moody's does not expect major integration issues since DSSA will be run separately, but does expect that significant synergies, especially sales synergies, may be difficult to achieve.

To fund the transaction Cott plans to issue $615 million in new senior unsecured notes, and to issue $113 million of convertible preferreds and $31 million of non-convertible preferreds. The company will also increase the size of its senior secured revolving credit facility to $400 million from $300 million. Proceeds will be used to finance the equity purchase in the transaction and to repay an existing DSSA term loan. However, Cott intends to assume DSSA's existing $350 million 2nd lien notes. These changes result in $1.1 billion of incremental debt for Cott. However, the acquisition will also boost Cott's sales to approximately $3 billion from $2 billion and improve margins and cash flow.

The transaction is expected to close by the end of January, 2015, subject to the rollover consent from debt holders of DSSA's existing $350 million 10% 2nd lien notes and regulatory approvals.

Moody's took the following rating actions

Cott Corporation

Ratings affirmed:

Corporate Family Rating at B2;

Probability of Default rating at B2-PD;

Speculative Grade Liquidity Rating at SGL-2

Cott Beverages, Inc.

Ratings affirmed:

$525 million of senior unsecured debt at B3 (LGD5);

The stable outlook assumes that the acquisition of DSSA will be successful and not become a distraction to Cott as it seeks to manage this disparate business, while also transforming its own business model and integrating Aimia Foods, which was acquired in May. It also assumes that no further large acquisitions or share buyback will be contemplated before leverage is significantly reduced.

Given the potential for volatility in Cott's operating performance, a ratings upgrade would require debt-to-EBITDA of below 3.5 times on a sustainable basis, complemented by a good liquidity profile and demonstrated positive momentum in volumes, revenues, and profitability. A decline in earnings as a result of volume declines, margin contraction, a weakening of Cott's liquidity, or an increase in leverage such that debt-to-EBITDA approaches 5.5 times could result in a ratings downgrade. Further large acquisitions, or share buybacks before leverage has been reduced to below 3.5 times could also result in a downgrade.

The principal methodology used in these ratings was Global Soft Beverage Industry published in May 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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