ABG’s Debt Ratings May Face Downgrade If Reebok Acquisition Delays IPO

S&P Global Ratings revised the CreditWatch implications on Authentic Brands Group (ABG) to developing from positive as its pending acquisition of Reebok may delay its initial public offering.

On August 12, Authentic Brands Group Inc. announced plans to acquire Reebok from Adidas AG for a total consideration, including earnout payments, of about €2.1 billion. The acquisition is expected to close in the first quarter of 2022.

S&P said it placed its ratings, including the ‘B’ issuer credit rating, on the company on CreditWatch with positive implications on July 7, 2021, following its IPO filing The developing listing reflects the possibility that S&P could affirm, lower or raise the ratings following its review.

S&P wrote in its analysis, “The CreditWatch Developing status indicates we may raise, lower or affirm the ratings on ABG within the next 90 days after we receive additional information necessary to evaluate the rating. On August 12, 2021, ABG announced that it had entered a definitive agreement to acquire the Reebok business from Adidas AG, subject to regulatory approval. The impact of the final terms of the proposed acquisition on ABG’s credit quality is not yet clear. Specifically, we do not have details regarding how ABG will finance the acquisition, any potential changes to the company’s operating structure or business model, the potential earnings impact on the group, or whether the group will materially change its strategic focus or financial policies beyond the proposed acquisition.

“In July 2021, ABG filed an S-1 with the New York Stock Exchange (NYSE) indicating the potential for undertaking an IPO in the coming months. We believe the announcement and the planned acquisition of Reebok could delay the company’s public listing as it will need to amend its filing to include the financials from Reebok.

“We plan to resolve the CreditWatch listing upon receipt of more information about the company’s financing plans, including the timing of the IPO listing. We also expect to receive additional information about Reebok’s financial performance, integration plans, and the company’s financial policies.

“We could affirm the ratings if we expect the company to maintain aggressive financial policies, the company does not complete an IPO or IPO proceeds are not applied to material debt reduction, resulting in leverage maintained above 5x, and we do not change our view of the company’s competitive advantage or scale and diversity.

“We could lower the ratings if we estimate that leverage could increase to the mid-6x if the company were to fund the acquisition primarily with debt without meaningful incremental EBITDA contribution or if the company does not successfully complete an IPO leading to higher debt levels. The downside to the ratings could also be driven by the company’s continued adoption of a more aggressive financial policy driven by the lack of debt reduction and an appetite for incremental acquisitions without sufficient incremental EBITDA contribution. We continue to expect Authentic Brands’ consortium of financial sponsors will retain majority control upon completion of the IPO. Lower ratings could also reflect our belief of greater integration risk with Reebok, the company’s largest acquisition to date.

“We could raise the ratings if credit measures pro forma for the transaction improve considerably from current levels. This could occur if the company is able to successfully complete its IPO listing over the coming months and utilize the proceeds from the IPO to fund a part of the Reebok acquisition and we believe that ABG will be able to integrate the Reebok business successfully and maintain more conservative financial policies, resulting in proforma leverage sustained below 5x.

“On a stand-alone basis, we expect ABG to generate improved EBITDA and free cash flow through operating gains as retail volumes rebound and incremental EBITDA from the recently acquired brands, and maintain credit measures appropriate for the current rating, including pro forma weighted-average debt to EBITDA maintained at or below 5x.”

Photo courtesy Reebok