Singer Sri Lanka rating unaffected by Hayleys' takeover

Fitch Hayleys PLC's acquisition of a controlling stake in Singer (Sri Lanka) PLC is neutral for Singer's rating and doesn't affect the organisation, Fitch Ratings said on Wednesday.

"This is because Hayleys' balance sheet will be stretched significantly following the completion of the Singer acquisition despite Hayleys' stronger business risk profile as the purchase is likely to be largely funded by debt and existing cash. In Fitch's view, this is likely to limit Hayleys' ability to provide extraordinary support to Singer if required, especially given the size of Singer's own balance sheet and its significant debt," it said in a media release.

Last week Hayleys purchased a 61.73 per cent stake in Singer from its main shareholder Retail Holdings (Sri Lanka) BV for Rs.10.9 billion. Retail Holdings will retain a stake of 9.47 per cent for the time being while Hayleys will make a mandatory offer as required by local regulations to purchase the remaining per cent of Singer.

"We estimate that following Hayleys' acquisition of 61.73 per cent of Singer, Hayleys' consolidated lease-adjusted debt net of cash/operating EBITDAR of 3.9x as at end-March 2017 (FY17) will increase to 5.8x, all else remaining equal. Hayleys' leverage could increase further depending on the use of more debt to fund the remaining stake in Singer following the completion of the mandatory offer. Fitch estimates that Hayleys' financial flexibility will be stretched even further at the stand-alone company level through which a bulk of the investment in Singer will be made," it said.

With the acquisition, Singer, the biggest consumer-durable retailer in the country, will become Hayleys' largest subsidiary contributing an estimated 23 per cent of the Hayleys group's post-acquisition pro- forma consolidated EBITDA. Hayleys' other significant operating segments include transportation and logistics, purification and agriculture, whose contribution to Hayleys' post-acquisition pro-forma consolidated EBITDA will drop to approximately 13 per cent, 11 per cent and 10 per cent, respectively, according to Fitch's estimates, with all else being equal.

Fitch said it also doesn't currently expect Singer to benefit from any significant operational synergies from being part of the larger Hayleys group. "We do not believe there will be additional pressure for higher dividend upstreaming from Singer to its new parent as Singer's average dividend payout has been above 60 per cent in the past, which is materially higher than what we have seen with most of Hayleys' subsidiaries," the ratings agency said.