lock-in agreement signed by both companies on Aug. 16.
Proceeds of the sale totalled US$1.14 billion, and will be used primarily to reduce debt.
IP’s acceptance of the offer satisfies the minimum shareholder acceptance
condition of the full takeover offer, launched Sept. 14.
“This is an important first step in IP’s transformation plan, and I’m pleased with how quickly we completed the transaction. It’s an indication that we are serious and focused on getting value and executing our strategy," said John Faraci, IP’s chairman and chief executive officer.
"While we remain confident in CHH’s leadership and strategy to grow and improve, our priorities have evolved and the business climate has changed. The timing was right for us to divest our interests."
CHH has subsequently announced changes to its Board of Directors following the final settlement between International Paper and Rank Group.
Bob Grillet, Andrew Lessin, Brian McDonald, Jonathan Mason and Maximo Pacheco have resigned as directors of CHH. They have been replaced by a team led by Rank Group head Graeme Hart. Alongside Hart is Tom Degnan and Mark Burrows, who are both from Burns Philp which is 54 per cent owned by Hart. Tim Hardman, Rank’s operations director and Bryce Murray, Rank’s financial director round out the new additions to the board.
Following the change in control of the company, Moody’s Investors Service has lowered the long-term senior unsecured rating of CHH to Baa3 from Baa2.
At the same time, the rating remains on review for possible downgrade, reflecting the associated uncertainty as to CHH’s financial and operating profile going forward. Moody’s also continues to believe that there is a material risk that the company will be downgraded to non-investment grade in the near future.
The downgrade to Baa3 is based on the assumption that Rank is effectively debt funding its acquisition of CHH, which will likely place increased pressure on CHH to increase shareholder returns to assist in the servicing of that debt at the consolidated Rank Group level. This in itself is a material change in its credit profile compared to the pre-Rank acquisition.
Moody’s notes that some uncertainty exists over CHH’s liquidity profile going forward given that the current committed standby facility is being renegotiated as a result of the change in control. However, its need to access this facility is considered relatively low as it is expected to receive funds from the sale of its forestry assets in early October. The sale agreement on these assets is now unconditional. It intends to use the proceeds to pay out its existing bridge facility and commercial paper obligations. As a result, CHH’s debt profile will be dominated by the US$ senior debentures that are not due to mature until 2015 and 2024. Moody’s also understands that CHH will be able to fund 2005 capital expenditure and general working capital requirements from operating cash flow and cash reserves.
The review will continue to focus on the likelihood of any restructuring activities, including asset sales or further debt increases, and the impact of such changes on CHH’s operating and financial profile. The nature and scale of debt increases, increases in capital returns to shareholders and asset divestments will determine the rating outcome for CHH. Moody’s notes in this context CHH remains relatively lowly levered for a Baa3 company and that there exists the potential for increases in debt and/or capital returns to occur without automatically resulting in a further downgrade.
The key risk however is that the Rank group chooses to substantially change the asset profile of CHH or significantly increase leverage. Moody’s also notes the Rank group owns substantial interests in other companies and may have the wherewithal to service acquisition debt for CHH without necessarily materially changing CHH’s asset profile or leverage. Moody’s further notes that if the Rank group is unsuccessful in its offer to acquire 100 per cent control of CHH it may be limited in its ability to fully control the cashflows of CHH.