NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' Long-Term Issuer Default Ratings (IDRs) of Twenty-First Century Fox, Inc. (FOX), and its wholly owned subsidiary 21st Century Fox America, Inc., following the Dec. 15, 2016 announcement that FOX will acquire the 60.9% of Sky plc (Sky) it does not already own for $14.8 billion. The Rating Outlook remains Stable.
FOX expects to fund the acquisition as it is currently structured with cash on hand and approximately $10 billion of new debt. Fitch expects pro forma total leverage at closing to exceed 4.0x, well outside its maximum leverage expectation for the rating of 3.0x. However, management was very clear that it remains committed to its investment grade ratings and expects to rapidly delever through EBITDA growth and free cash flow (FCF) generation, returning leverage to within its stated leverage target of 2.5x to 3.0x. Fitch takes comfort from management's comments and estimates that total leverage declines to below 3.0x within 24 months after closing.
Fitch takes an overall neutral view of the acquisition provided the company successfully reduces leverage within Fitch's expectations. Sky provides additional product line and geographic diversification, further reduces FOX's reliance on cyclical advertising revenues, and is expected to generate between $800 million to $1 billion of annual FCF according to Fitch estimates. Sky also provides potential technological benefits for FOX's over the top (OTT) programming efforts in the U.S.
Fitch believes the vertical integration (alternatively - combination of content creation assets with distribution) positions FOX to accelerate the pace of innovation related to the consumption of media and video content. However, Fitch holds that the combined company's ability to influence changing media consumption patterns, emerging distribution platforms and technology evolution and adoption is fraught with execution risks and clouds the strategic rationale supporting the acquisition and management's decision to increase leverage to accommodate the transaction. As such, Fitch does not believe the benefits offer sufficient upside to fully justify the transaction given the price FOX is paying.
On Dec. 15, 2016, FOX announced it would acquire the 60.9% of Sky it did not already own at a price of GBP10.75, a 40% premium to Sky's Dec. 6, 2016 closing price, representing a total purchase price of $14.8 billion based on the prevailing exchange rate of 1.27 USD/GBP. The transaction values Sky at $31.8 billion, including assumed debt, which represents an 11.4x multiple of Sky's fiscal year end June 30, 2016 adjusted EBITDA of $2.8 billion. FOX has a committed bridge facility for up to $15.5 billion to fund the acquisition.
Fitch will review the transaction if, among other things, the purchase price or transaction terms change materially as a result of shareholder, regulatory or other requirements or due to a material change in exchange rates. One particular area of concern involves structural considerations, including whether FOX provides guarantees on or exchanges Sky's debt.
KEY RATING DRIVERS
Strong Business Profile: Fitch holds FOX's overall strategic positioning in high regard, as its businesses consist of a strong portfolio of cable networks, leading television and movie studios, and a national television network and local television broadcast assets, each with the scale characteristics necessary to operate at high margins. Fitch believes these businesses position FOX with solid growth prospects and the ability to generate meaningful levels of FCF, and balanced against the risks inherent in the company's operating profile, place the company solidly within Fitch's parameters for the 'BBB+' rating.
Consistent Financial Policy: If FOX is successful in acquiring the remainder of Sky's ownership, Fitch expects the company will use FCF generation along with its cash balances to repay debt in a sufficient amount to return leverage to within their leverage target of between 2.5x and 3.0x within 24 months after closing. Outside of potential merger and acquisition activity, Fitch expects that FOX will use its cash balance to further invest in its core businesses and growth initiatives while curtailing share repurchases until leverage is below 3.0x.
Investments Provide Upside: FOX's other equity investments include a 50% interest in Endemol Shine Group and a 33% interest in Hulu. Fitch believes these investments allow FOX to be at the forefront of providing content to OTT and emerging distribution platforms and capturing more audiences in a fragmented television viewing ecosystem. While the investments do not yet provide meaningful contributions to earnings, the investments are a source of liquidity, if needed.
Credible Strategy to Address Threats: Fitch continues to believe that FOX is well positioned to address the secular threats and opportunities presented by emerging alternative distribution platforms and continued audience fragmentation across the media and entertainment landscape. The ratings incorporate expected earnings volatility generated by the company's Filmed Entertainment segment, given the general hit-driven nature of the movie industry.
Rating Concerns: Exposure to cyclical advertising revenues within the company's local television and Fox Network ad sales, as well as the company's capacity to adapt to ever-changing media consumption patterns and technology platforms, highlight rating concerns. Fitch notes that advertising revenues were approximately 28% of revenues as of last twelve months ended Sept. 30, 2016.
KEY ASSUMPTIONS
Fitch's key assumptions within the agency's rating case for the issuer include:
--A late calendar 2017 close of the Sky acquisition under existing terms and conditions. Thereafter, FOX uses a significant portion of its FCF to repay debt, returning leverage to below 3.0x by the end of calendar 2019. During that period, Fitch assumes FOX curtails its share buyback activity to free up more cash for debt repayment.
RATING SENSITIVITIES
Positive: Fitch does not anticipate a rating upgrade given FOXA's current focus on acquiring the 60.9% it does not own of Sky.
Negative: Negative rating actions would be considered if FOXA does not reduce total leverage to below 3.0x within 18 to 24 months after the closing of the Sky acquisition. Fitch would also consider a negative rating action if there is a material change in the terms of the acquisition prior to closing as a result of regulatory or shareholder requirements.
LIQUIDITY
Fitch believes that FOXA's liquidity position and financial flexibility are strong for the rating given the strength of its businesses and expected FCF generation. The company's liquidity position is supported by existing cash balance totalling $4.7 billion as of Sept. 30, 2016 (approximately $1 billion held by foreign subsidiaries as of June 30, 2016) and the borrowing capacity from its $1.4 billion revolver which expires May 2020.
The company generated approximately $3.2 billion of Fitch-defined FCF for the LTM period ended Sept. 30, 2016. FCF generation remains strong even as the company continues to invest in channel launches, original content, and higher costs to acquire programming (including sports programming) across the company's portfolio of cable and television networks. Fitch expects these investments will remain among the company's key priorities during its fiscal year 2017.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
Twenty-First Century Fox, Inc.
--Long-Term IDR at 'BBB+'.
21st Century Fox America, Inc.
--Long-Term IDR at 'BBB+';
--Senior unsecured at 'BBB+'.
Date of Relevant Rating Committee: Dec. 15, 2016
Additional information is available on www.fitchratings.com.
The following issuer(s) did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure: Twenty-First Century Fox, Inc., 21st Century Fox America, Inc.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016673
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016673
Endorsement Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001