Moody's says Costco's deal in Mexico is prudent

NEW YORK -- Moody's Investors Service commended Costco Wholesale Corp. Thursday for its plans to buy up the remaining stake in its joint venture in Mexico and said its rating on the warehouse club's debt remains unchanged.

The wholesale club operator announced earlier in the day that it is buying the 50 percent stake held by Controladora Comercial Mexicana SAB in its Mexican division for about $760.4 million. Costco Wholesale and Controladora have each had a 50 percent interest in Costco de Mexico SA de CV, which was run by Costco Wholesale.

Moody's said the deal would have no impact on Costco's A1 investment-grade rating or stable outlook and should be viewed as a credit positive.

"The 50 percent share buyout decision in the Mexican (joint venture) is the logical next step in the prudent and conservative strategy that Costco has thus far employed for expansion into international markets where its concept resonates," Moody's Senior Analyst Charlie O'Shea said in a statement. "We expect Costco's international expansion to continue to be prudently managed going forward, with new markets entered conservatively."

Costco is able to absorb a transaction of this size with minimal impact on its liquidity, according to O'Shea.

Investment analysts echoed the rating agency's support of the deal. Janney Capital Markets analyst David Strasser said that he expects that the deal will add 10 cents to 12 cents per share to the company's earnings over the next twelve months and raised his estimates based on the news. And Stifel Nicolaus analyst David Schick was bullish on the long-term prospects for business in Mexico

Costco, based in Issaquah, Wash., is the largest U.S. wholesale club operator. It operates 435 clubs in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, eight in Taiwan, seven in Korea and three in Australia.

Its shares increased $2.40, or 2.8 percent, to close at $89.83. They fell 18 cents after hours.