Cargill outlook downgraded to negative
reflecting concern that higher capital expenditure will slow debt
The latest report from credit rating agency Fitch points out that Cargill's consolidated debt on 28 February 2006 was $14.8 billion, including $2.6 billion of non-recourse debt of The Mosaic Company (Mosaic) and $1.5 billion of non-recourse VIE debt.
The company, which had revenues last year of $71bn, has been increasingly moving into higher margin businesses such as developing ingredients for food groups, and away from core commodities.
This of course has involved a great deal of capital expenditure.
"While capital expenditures may be somewhat flexible, committedcapital expenditures continue to increase," said Fitch. "Fitch anticipates Cargill will maintain its higher rate of capital expenditures to reach its goal of transforming itself from a pure commodity producer to a provider of customer solutions."
Fitch argues for example that the recent Degussa Food Ingredients acquisition (for $553 million plus $132 million in assumed debt) and higher capital expenditures will likely slow debt reduction in the near term.
Degussa initially agreed to sell its food ingredients business for € 540 million back in October 2005. But clearance of the acquisition only came last month after a detailed Commission inquiry, which was set up following concerns over horizontal overlaps of the parties' activities within the lecithin sector.
The addition will confirm Cargill as a major supplier of starches, hydrocolloids, soy proteins, emulsifiers, dairy and meat cultures, and give it a significant position in ingredients systems and blends and health promoting ingredients.
But such acquisitions are costly. Fitch said that the expansion in capital expenditures from $731m in 2002 to almost $1.8bn for the latest 12 months has reduced free cashflow to below $300m.
In addition, Cargill's high geographic and product-line diversification at times tempers operating earnings and cash flow volatility associated with the agricultural sector.
Cargill's long-term financial situation appears secure however. The credit rating agency's revision will not affect the company's long term rating, which was left unchanged at A+.
And in addition, the Outlook may be revised back to Stable if Cargill can "return credit metrics to more appropriate levels in 12 months".
Cargill is the largest agricultural firm and one of the largest private companies in the world. Its major agricultural operations include oilseed processing, primarily soybeans, corn milling, meat processing and animal nutrition.