DBRS Morningstar Comments on George Weston Limited’s Sale of its Weston Foods Fresh and Frozen Businesses

DBRS Limited (DBRS Morningstar) notes George Weston Limited’s (George Weston or the Company, rated BBB with a Stable trend by DBRS Morningstar) announcement that the Company has signed a definitive agreement to sell its Weston Foods fresh and frozen bakery businesses (approximately 75% of Weston Foods’ 2020 net sales) to affiliated entities of FGF Brands Inc. for an aggregate cash consideration of $1.2 billion. As previously announced, George Weston is also in the process of selling the remaining Weston Foods business, which comprises cookies, cones, crackers, and wafers and expects to return the aggregate net proceeds of the transactions to shareholders through share repurchases over time. The transaction is subject to regulatory approval and is expected to close before the end of the first quarter of 2022.

DBRS Morningstar’s ratings on George Weston are currently based on (1) the Company’s position as the holding company of Choice Properties Real Estate Investment Trust (Choice, rated BBB (high) with a Stable trend by DBRS Morningstar—approximately 61.7% ownership), (2) the Company's position as the holding company of Loblaw Companies Limited (Loblaw, rated BBB (high) with a Stable trend by DBRS Morningstar—approximately 52.6% ownership), (3) the Company’s ownership of Weston Foods, and (4) the strength of George Weston's credit metrics and liquidity profile. DBRS Morningstar calculated a weighted-average subsidiary rating (WASR) of BBB based on each subsidiary’s contribution to George Weston’s available cash flow, adjusted for George Weston’s ownership interest in each respective subsidiary with a one-notch penalty for the structural subordination on the leveraged cash flows received from Loblaw and Choice. DBRS Morningstar combined this WASR with the assessment of George Weston’s financial and liquidity profile, which DBRS Morningstar views as strong for the BBB rating.

On March 23, 2021, following George Weston’s announcement that the Company intended to divest its bakery business, Weston Foods (see DBRS Morningstar’s press release dated March 23, 2021), DBRS Morningstar noted its expectation that the Company’s ratings would remain the same following the divestiture. Following the close of the transactions, DBRS Morningstar would expect to continue to base its ratings on George Weston on (1) the Company’s position as the holding company of Choice, (2) the Company’s position as the holding company of Loblaw, and (3) the quality of the Company’s liquidity profile. DBRS Morningstar expects the WASR to remain at BBB, based on the respective contributions of Loblaw and Choice to George Weston’s cash flows, through dividends and distributions, and adjusted for George Weston’s ownership interest in each entity with a one-notch penalty for structural subordination.

DBRS Morningstar notes that, as long as the ratings on Loblaw and Choice are BBB (high), the ratings on George Weston, as a pure holding company, would effectively be capped at the BBB level because of the structural subordination. Conversely, although unlikely, George Weston's ratings could be lowered if DBRS Morningstar downgraded Loblaw and Choice or should George Weston’s nonconsolidated debt levels exceed 20% of nonconsolidated capital, which may result in the one-notch differential between the subsidiaries, Loblaw and Choice, and George Weston being inadequate.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Consumer Products Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382072) and DBRS Morningstar Criteria: Rating Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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