NEW YORK--()--Fitch Ratings has affirmed the 'BBB+' Issuer Default Rating (IDR) of News Corporation (News Corp.) and its related entities. The Rating Outlook is Stable.
In Fitch's view, the company's intention to pursue the separation of its publishing and media and entertainment businesses into two distinct publicly traded companies will not have a material negative impact on the operating or credit profile, and the remaining entity will be solidly within Fitch's parameters for 'BBB+' ratings.
News Corp. has significant flexibility at its current ratings, given the strength of its remaining underlying businesses, leverage metrics below Fitch's 3 times (x) target and strong liquidity and free cash flow.
Fitch assumes that all of the outstanding debt will remain with the media and entertainment business (RemainCo). The indentures governing this debt contain typical investment-grade asset divestiture clauses, and Fitch does not believe that the publishing and education businesses (SpinCo), which comprise approximately 14% of LTM EBITDA and 24% of total assets, comprise 'all or substantially all' of the assets. Under this assumption, total leverage will increase from 2.2x at March 31, 2012, to 2.6x. This is well within Fitch's target 3.0x threshold for current ratings.
Detailed capital structures for SpinCo and RemainCo have not been provided. Fitch expects News Corp. will capitalize SpinCo with a substantial amount of cash to enable it to fund its operations, as well as handle any potential fines, settlements and legal fees that arise from the ongoing investigation into phone hacking and inappropriate payments at News of the World. Fitch believes that any potential capitalization of SpinCo, as well as the expected $5.4 billion of share repurchases over the next 12 months, will be manageable within RemainCo's ratings. At March 31, 2012, News Corp. had $10.7 billion of cash on hand, an undrawn $2 billion RCF maturing May 2017, and annual FCF generation of $2.5-$3 billion post separation.
Fitch expects the company to maintain similar financial policies at RemainCo post transaction, including leverage of 2.0-2.5x and a large cash cushion. Indications of a shift in financial policy could result in negative ratings actions.
The transaction will result in an improved operating profile at RemainCo, given the divestiture of the company's lowest-margin, most capital intensive, and secularly challenged business. It will result in only moderately lower FCF, as the publishing segment generates approximately 14% of consolidated EBITDA and comprises more than 40% of consolidated capital expenditures. Fitch estimates that EBITDA less capital expenditures (as a proxy for segment free cash flow) was less than $600 million for the LTM period ended March 31, 2012. Fitch estimates News Corp. generated $3.1 billion of free cash flow in this same period. Additionally, pro forma for the transaction, Fitch estimates that consolidated EBITDA margins improve by 260 bp, form 19.6% to 22.2%. The high-margin cable networks business now comprises approximately 60% of total EBITDA (up from 50% pre-transaction).
Fitch notes that RemainCo will have reduced financial flexibility within the 'BBB+' ratings vis a vis News Corp. presently to accommodate M&A activity or operating weakness. This is the result of the lower absolute levels of pro forma EBITDA and free cash flow, the moderately higher leverage, and the reduced pro forma cash balance.
As stated, Fitch expects SpinCo to be capitalized with the ability to handle any potential phone-hacking and inappropriate payment related fees and fines. However, in the event that such liabilities exceed SpinCo's ability to pay, Fitch expects RemainCo to become the obligor. Fitch believes that News Corp's liquidity position will enable the two entities to easily manage this. Fitch continues to believe that the events at the U.K. newspaper business will not pressure the company's operations, FCF generating capability, or liquidity to a degree where there would be a negative rating effect.
At March 31, 2012 News Corp.'s total debt was $15.5 billion, consisting primarily of senior unsecured notes issued at News America Inc. (some are issued under that entity's former name, News America Holdings, Inc.). The next maturity is a $273 million note in February 2013.
Fitch affirms the following ratings:
--Issuer Default Rating (IDR) at 'BBB+'.
News America, Inc.
--IDR at 'BBB+';
--Senior unsecured at 'BBB+'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Evaluating Corporate Governance' (Dec. 13, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance