Cargill has agreed to acquire Norwegian salmon feed producer EWOS for about $1.5 billion and has completed its acquisition of the chocolate business of Archer Daniels Midland Co. for $430 million. Cargill also has agreed to sell its US-based pork business to JBS USA Pork for $1.45 billion, pending regulatory review, and divested the majority of its investment holdings in its asset management subsidiary Black River Asset Management.
“We do not believe these changes to the company’s business mix change the company’s overall business risk profile, and based on our revised projections we believe the company’s cash flow ratios will modestly improve,” said Kim Logan, a credit analyst for Standard & Poor’s.
Standard & Poor’s expects Cargill will grow earnings slowly, build cash and modestly reduce leverage.
“We believe a combination of lower costs, a generally favorable outlook for origination and processing, and earnings contribution from the EWOS acquisitions will offset lost earnings from anticipated dispositions,” Standard & Poor’s said. “Moreover, muted working capital requirements and net proceeds from its announced asset sales should permit the company to maintain debt to EBITDA well below 1.5x over next two years as the company actively reviews its portfolio mix of businesses.”
Standard & Poor’s said it would consider a downgrade if EBITDA exceeds 2.5x.
“Given the company’s history of earnings volatility, we believe this could occur during a weak earnings cycle similar to that of fiscal 2012, when a combination of a weak financial and grain trading markets, poor fundamentals in beef processing, and other factors led to EBITDA declining by close to $2 billion,” Standard & Poor’s said.
Standard & Poor’s said it would consider a higher rating if Cargill reduces future earnings volatility and sustains debt to EBITDA near or below 1x, but Standard & Poor’s said that was not likely to happen over the two-year outlook period.
“We believe the company would have to demonstrate several consecutive years without annual EBITDA swings in excess of $ 1 billion prior to considering an upgrade,” Standard & Poor’s said.