CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an initial Issuer Default Rating (IDR) of 'BBB+' to Scripps Networks Interactive, Inc. (SNI). The Rating Outlook is Negative. A complete list of ratings is outlined at the end of this release. As of Dec. 31, 2014, SNI had approximately $1.5 billion of debt outstanding, pro forma for the repayment of a January maturity.
The Negative Outlook reflects the elevated leverage related to SNI's recent announcement to acquire a 52.7% controlling interest in Polish television operator TVN for EUR584 million in cash plus the assumption of Eur840 million of debt. Fitch calculates pro forma gross leverage at 2.7x, which exceeds Fitch's threshold of 2.5x for the assigned rating. However, Fitch expects SNI to focus on de-levering below 2.5x within 12-18 months.
KEY RATING DRIVERS
--SNI's portfolio of cable networks and leading home and lifestyle programming brands provide the foundation of the ratings.
--Acquisition of controlling stake in TVN is in line with the company's international expansion strategy. SNI's financial priorities remain consistent and focused on internal investment and international expansion. However, the acquisition limits the company's flexibility within the assigned ratings to accommodate operational missteps and share repurchases.
--Fitch expects SNI to focus on paying down debt following the acquisition of TVN and de-levering to a range of 2.0x-2.5x. Pro forma for the TVN acquisition, Fitch calculates SNI's gross leverage at 2.7x, which exceeds Fitch's threshold of 2.5x for the assigned rating. Fitch anticipates SNI will generate in excess of $400 million of annual free cash flow (FCF) which could facilitate expected debt reduction. Note however that Fitch does not expect the company to increase leverage to facilitate a more aggressive shareholder-return policy.
--Since separating from The E.W. Scripps Company in July 2008, SNI adopted a conservative financial policy and managed its leverage to between 1.2x and 1.4x. Although the TVN acquisition increases leverage to 2.7x, Fitch expects SNI will focus on reducing debt.
--SNI's reliance on advertising revenues is among the highest within the sector and, in Fitch's opinion, elevates the operating risks inherent in the company's operating profile.
SNI's portfolio of cable networks - in particular the company's HGTV, Food Network and Travel channel brands, each of which reach nearly 100 million subscribers throughout the U.S. - are the foundation of SNI's ratings. SNI's operating profile benefits from the stable, recurring, dual-stream revenue profile, high operating margins and FCF generation characteristics attributable to its cable network businesses. A level of ratings volatility at any given network is also factored into the credit ratings.
SNI's capital allocation strategy is centered on investing in original programming and production, international expansion, maintaining a strong balance sheet and returning excess capital to its shareholders. Fitch expects that SNI will continue investing in its core businesses and international growth initiatives while supporting shareholder returns within the context of reducing leverage to a range of 2.0x-2.5x. The company's shareholder returns (dividends and share repurchases) amounted to approximately $1.3 billion during 2014. During February 2015, the board authorized an additional $1 billion under SNI's share repurchase program. Approximately $1.4 billion of capacity remains available under the company's share repurchase program.
Fitch acknowledges a level of event risk is present within the company's credit profile as it relates to the potential rationalization of SNI's ownership interests in Television Food Partnership, GP (TVP) and the Travel Channel (TC) partnership. SNI owns a 69% controlling interest in TVP and is the most logical buyer of Tribune Media Company's (Tribune) 31% ownership interest in the partnership. There are no formal put or call rights held by either partner; however, SNI holds a first right of refusal. Fitch considers a potential purchase of Tribune's non-controlling interest as event risk. SNI also owns a 65% controlling interest in Travel Channel, LLC and TCM Sub, LLC, while a subsidiary of Cox Communications, Inc. (CCI) retains a non-controlling of 35% interest in the joint venture. CCI has the right to put its 35% ownership interest to SNI for fair value at the time the option is exercised. Conversely, SNI has the right to call CCI's ownership interest in the joint venture beginning in August 2015 for fair value at the time the option is exercised.
SNI generated approximately $394 million of FCF during the year ended Dec. 31, 2014, as higher programming and production costs, cash taxes and dividends paid to non-controlling interests weighed on FCF generation. FCF generation generally affords the company significant financial flexibility.
Fitch anticipates that investments in original programming and international expansion will remain key strategies during 2015. Notwithstanding the pressures on FCF generation, SNI's FCF metrics remain strong relative to its peer group. Fitch expects the company to generate FCF margins in excess of 15% this year.
Rating concerns center on the company's high exposure to cyclical advertising revenues relative to its peer group, the lack of scale and scope of its international business, and high revenue concentration within the company's top three brands. Additional rating considerations include the company's ability to adapt to changing media consumption patterns and technology platforms as well as its capacity to deliver programming to its cable networks that drive incremental share of an increasingly fragmented viewing audience.
Advertising revenues represented approximately 67% of SNI's consolidated revenues during the year ended Dec. 31, 2014. Advertising revenues tend to be more cyclical and volatile than more stable affiliate fee revenue sources, exposing the company to economic fluctuations. Moreover, SNI's revenue mix makes the company more susceptible to hit-driven volatility of cable network programming ratings and share of viewing audience. Fitch recognizes that a substantial portion of SNI's programming is consumed live in the linear format which is very attractive to advertisers. Additionally, the company's lifestyle and home-themed programming is a leader in the very desirable upscale female demographic. To ensure stable demand from advertisers SNI needs to consistently deliver ratings within its targeted demographic.
Ratings volatility will eventually lead to volatile advertising revenues. Competition for viewing audience within the targeted demographic will remain fierce. SNI, similar to other cable networks, seeks to differentiate its networks by investing in original programming. To that end many of SNI's networks will increase the number of hours of original programming broadcast across their respective platforms. Travel Channel for instance intends to produce 400 hours of original content during 2015.
International expansion both organically and through acquisition remains a top strategic priority for SNI and presents the company with potential revenue and cash flow growth opportunities. Fitch acknowledges that SNI is in the early stages of executing its international strategies. However, the company has yet to demonstrate that its brands have a broad and reliable global reach and that its content is leverageable in international markets. SNI's acquisition of a controlling interest in Polish TV operator, TVN, demonstrates SNI's international growth strategy. Pro forma for the transaction, international revenues would have accounted for 16% of consolidated 2014 revenues. Overall, Fitch believes that international markets represent a compelling revenue and cash flow growth opportunity for many media companies as they capitalize on globalizing their respective brands and content.
Fitch believes that SNI's liquidity position and financial flexibility are adequate for the rating given the strength of its businesses, expected FCF generation, and access to capital markets. The company's liquidity position is supported by the borrowing capacity from its $650 million revolver, which expires during March 2019. SNI's maturity schedule is manageable with $500 million due in 2016 (December).
KEY ASSUMPTIONS
--Advertising revenues are expected to grow mid-single digit while affiliate fee revenue is projected to grow between 4% and 5% during the forecast period;
--Assumes minor margin pressure reflecting increasing programming and production costs due to higher investment in original programming. However the model assumes that SNI's ongoing cost reduction efforts will largely offset programming and production cost pressure;
--2016 maturities are refinanced; FCF and cash are prioritized to pay down debt;
--No material acquisitions in 2016-2018.
RATING SENSITIVITIES
What Could Lead to a Positive Rating Action:
--Given the Negative Outlook, Fitch does not expect a positive rating action during the rating horizon. The Outlook could be stabilized as the company demonstrates progress in reducing leverage to below 2.5x within the next 12-18 months.
What Could Lead to a Negative Rating Action:
--Negative rating actions are more likely to coincide with either discretionary actions of SNI management, including adopting a more aggressive financial strategy, or the inability to delever below 2.5x within 12-18 months following the TVN acquisition.
--Other negative triggers include execution risks and capital requirements related to the company's ongoing international expansion efforts having a negative impact on the company's operating profile.
Fitch has assigned the following ratings with a Negative Outlook:
SNI:
--IDR rated 'BBB+';
--Senior unsecured revolver rated 'BBB+';
--Senior unsecured notes rated 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984021
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.