Uncategorized

The new M&A – mergers and asset sales

| March 29, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

After a few years of gorging on large acquisitions and stretching balance sheets in an effort to post growth, management teams seem to be shifting gears.  As noted in the APS 2019 Outlook, balance sheets and strong credit profiles would likely be a catalyst for positive credit spread momentum in 2019. While credit spreads have moved tighter since the start of the year, outperformance has occurred in names with pristine balance sheets, such as Best Buy (BBY), or companies that are delivering on debt reduction since closing large acquisitions, like Conagra (CAG). However, the most recent round of earnings calls marked a shift in how management teams are viewing the balance sheet, with more teams considering asset sales in addition to cash flows to reduce leverage after large acquisitions. These assets sales are likely to provide the next catalyst for credit outperformance. Credits that could outperform peers as they execute asset sales to repay debt include AT&T and Constellation Brands.

AT&T Inc. (T – Baa2/BBB/A-)

Debt reduction is a top priority after the close of the Time Warner Entertainment deal. AT&T management is looking to execute roughly $6 to $8 billion of asset sales, focusing on real estate and other non-core assets, in an effort to accelerate debt reduction. This is in addition to the $12 billion of free cash flow (after dividends) that the company is forecasting to generate in 2019 and will use to delever.  Based on estimates of $60 billion of adjusted EBITDA for the year, management believes it can reduce net debt to the $150 to $152 billion range, bringing net leverage to management’s 2.5x target range by year-end 2019.

As management reduces debt in a meaningful way, AT&T bonds could outperform peers, particularly VZ, in 2019. The largest catalyst for the outperformance of T bonds will be management’s ability to execute the aforementioned asset sales, which are imperative in getting to the approximate $20 billion of debt reduction in 2019.  Management’s willingness to shed assets to further reduce debt demonstrates their commitment to the leverage target.  With $13.2 billion of term loans outstanding coupled with $6.8 billion of debt maturing in 2019, including TWX’s $650 million maturity in June, AT&T can successfully hit its debt reduction target without the need for a tender offer.

Constellation Brands Inc. (STZ – Baa3/BBB)

STZ funded its increased stake in Canopy Growth Corp. with debt, bringing leverage up a turn to 4.6x.  At the time, management noted that they would use free cash flow to reduce leverage to its target of 3.5x within 18-24 months from the close (11/1/18).  Management’s commitment to the leverage target coupled with its ability to hit the target by halting share repurchases and acquisitions staved off a downgrade by Moody’s.  However after posting fiscal 3Q results that highlighted further weakness in the low end wine portfolio, STZ noted that they would be looking to divest some of the labels in an effort to return the portfolio to growth and deliver higher margins.

STZ stated that any asset sale proceeds will be used to repay debt and hit the leverage target before returning cash to shareholders. Coupled with strong free cash flow of over $1 billion in 2019, management now believes they can hit their leverage target within 12 months versus previous expectations of 18-24 months. Estimates are that STZ will need to repay roughly $3.0 billion of debt to hit its leverage target.  With $1 billion of debt maturing in 2019 and just shy of $2 billion of term loans outstanding, STZ may also be able to hit its leverage target without the need of a tender offer.  Most recently it has been reported that STZ is in advanced talks with E. & J. Gallo for some of the brands, which could fetch approximately $2 billion in proceeds.  While STZ is currently trading about 5 bp through higher rated ABIBB (Baa1/A- (*-)/BBB), their acceleration of debt reduction from asset sales should fuel further outperformance in the name. ABIBB has yet to reduce debt in a meaningful way since the close of the SAB Miller acquisition (10/10/16) and leverage could remain above 4.0x past 2020.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

Important disclaimers for clients in the EU and UK

This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.

This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.

This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.

This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.

The Library

Search Articles