Diageo said it would pay up to $610m for the gin company, an initial payment of $335m and up to $275m depending on the acquired company’s performance over the next 10 years.
The acquisitive company is using its own cash pile, which means no extra leverage. However, Moody’s has still deemed the deal credit-negative.
“The acquisition is credit-negative because it occurs while leverage remains relatively high as debt metrics have substantially weakened as lockdown measures dampened global spirits consumption, thus lowering the company's sales and profits,” the rating agency said.
This demonstrates the indirect effect economic shutdowns and the coronavirus pandemic are having on business decisions, according to a credit analyst at an investment house in London.
“Any other time and you’d be surprised to see agencies opine much on an event that doesn’t increase leverage,” said the analyst. “It’s a bit strange to see a company being penalised for using its own cash in a constructive way, but understandable. Covid continues to have far-reaching implications.”
Diageo’s leverage ratios have shot up this year as its earnings have fallen after bars and pubs across the world were forced to shut.
Leverage went from three times Ebitda at the end of 2019 to 4.2 times at the end of June.
“We expect leverage will further increase and likely peak in the first half of fiscal 2021,” said Moody’s, “remaining well above the 2.75 times to 3.25 times range we expect for its A3 rating.”
Diageo has a recent history of buying premium alcohol brands linked to famous actors. In 2017, it agreed an up to $1bn deal to buy tequila brand Casamigos, part owned by George Clooney, star of the 1997 film Batman & Robin.