TORONTO - Shoppers Drug Mart (TSX:SC) and Loblaw Companies Ltd. (TSX:L) are being placed under review by several rating agencies a day after announcing a friendly deal that will see the pharmacy chain bought out by the grocery giant for $12.4 billion.
Standard & Poor's is placing the companies on CreditWatch "with negative implications," which means it may lower or affirm the ratings within the next three months.
It also placed Loblaw's parent company George Weston Ltd. (TSX:WN) on CreditWatch with negative implications because of their rating links to Loblaw.
"Nevertheless, we believe that the combined entity can temporarily withstand a higher debt burden at the current ratings, considering the strategic benefit of this transaction as well as our expectation of free operating cash flow available for debt reduction in the next few years," Standard & Poor's credit analyst Donald Marleau said in a note.
DBRS also placed Shoppers Drug Mart under review with negative implications, reflecting Loblaw’s "potential assumption of approximately $1 billion of Shoppers’ debt."
It reduced Loblaw to "under review with developing implications," saying Loblaw’s business profile should benefit from increased scale, more diverse product offering and potential synergies.
When combined with the company’s intended deleveraging plan, DBRS says, it should largely offset the risks associated with the initial increase in financial leverage.
It is also reviewing its rating of Loblaw's parent company, George Weston Ltd. (TSX:WN), which said Monday it will subscribe for 10.5 million additional shares of Loblaw, with proceeds from the offering being used to pay a portion of the Shoppers purchase.