MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings believes Grupo Elektra S.A. de C.V.'s (Elektra) proposed acquisition of Advance America (NYSE: AEA) for approximately US$780 million will have no immediate impact on the company's ratings.
Currently, Elektra is solidly positioned within the 'BB-' rating category. The proposed acquisition of AEA, which has a higher business risk profile than Elektra and is partially funded with debt, would lower the company's credit quality but would not knock it from the 'BB-' category.
AEA's proposed acquisition is subject to some closing conditions, as well as to AEA stockholders' and regulatory approvals, and is valued at approximately USD$780 million minus total debt as of Dec. 31, 2011 (approximately USD$120 million). It is expected that the transaction would be financed by a combination of debt (including the recent US$150 million bond reopening that took place on Feb. 3, 2012) and cash on-hand. This acquisition would allow ELEKTRA to enter the payday lending market in the United States, which could lead to offering other services at AEA's locations. As of Sept. 30, 2011, Advance America operates 2,248 centers in the U.S. as well as limited operations in Canada and the United Kingdom. For the 12 months ended Sept. 30, 2011, AEA had revenues and EBITDA of US$604 million and US$113 million, respectively.
The proposed transaction would weaken Elektra's rating within its category, and debt leverage for the retail division (excluding financial businesses) would temporarily go up on a pro forma basis to approximately 2.7 times (x). However, Fitch expects that over the short to medium term this leverage ratio should return to levels at or below 2.5x. In addition Fitch anticipates that Elektra will not allocate further funds to AEA in the future.
Going forward, any financial support by Elektra of AEA or failure to reduce the retail debt to EBITDA ratio (excluding financial businesses) to levels consistent with Fitch's expectations would pressure the ratings and likely result in negative rating actions. AES has a weaker credit profile than Elektra due to its higher business risk as well as high regulatory risk and possible legal liabilities. This is significant, since the merged entity could derive about a sixth of the pro forma consolidated EBITDA from AEA (approximately 24% of EBITDA excluding financial businesses).
Elektra's ratings reflect its operation's geographical diversification, its market position both in the retail and finance business, the latter including Banco Azteca (BAZ; rated 'A(mex)' by Fitch), as well as the strong linkage between both operations. On the retail side, the ratings are supported by its market share, being one of the leading chains in its sector, with considerable brand equity (Elektra), supported by an extensive retail network across Mexico and, increasingly, in countries such as Guatemala, Honduras, Panama, El Salvador, Peru, Brazil and Argentina. Grupo Elektra's retail operations are strongly linked to those of Banco Azteca, a result of the retail business strategy of selling on credit. BAZ's credit quality is supported by its management expertise in consumer credit, asset quality, strong liquidity and the credit risk of its portfolio. The ratings incorporate the company's approach of offering financial services to low-income retail customers, a retail division's leverage (retail division's total debt to EBITDA) of 2.5x over the long term, controlling ownership by the Salinas family and track record of transactions with related entities.
Fitch currently rates Grupo Elektra as follows:
--Foreign and Local Currency Issuer Default Rating 'BB-';
--Long Term National Scale Rating 'A(mex)';
--Short Term National Scale Rating 'F2(mex)';
--US$550 million senior notes due 2018 'BB-';
--MXN $3,000 million Long Term Certificados Bursatiles issuances (ELEKTRA10-2 y ELEKTRA11) 'A(mex)';
--MXN $5,000 million Short and Long Term Certificados Bursatiles program 'F2(mex)' and 'A(mex)', respectively.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 12, 2011;
--'National Ratings Criteria', Jan. 19, 2011;
--'Evaluating Corporate Governance', Dec. 13, 2011;
--'Short Term Ratings for Corporate Finance', Aug. 12, 2011;
--'Parent and Subsidiary Rating Linkage', Aug. 12, 2011;
--'Operating Leases: Updated Implications for Lessees' Credit, Aug. 5, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143
Short-Term Rating Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=663651
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
Operating Leases: Updated Implications for Lessees' Credit
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462222
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