Approximately $15 Billion of Debt Instruments Affected
New York, June 28, 2012 -- Moody's Investors Service affirmed News America Incorporated's (NAI)
Baa1 senior unsecured ratings (guaranteed by News Corporation; News
Corp.) and stable rating outlook following News Corp.'s
announcement that its board of directors authorized management to pursue
the separation of its global publishing assets consisting largely of newspapers,
book publishing, education and marketing service businesses,
as well as all of its Australian operations (including non-publishing
businesses). The company also plans to contribute cash to the newly
formed company. News Corp. plans to retain its cable networks,
its Fox broadcast network and owned and operated TV stations, film
and television entertainment, and direct broadcast satellite (DBS)
operations and investments.
Moody's views a separation as credit negative for News Corp.,
since the assets being separated are estimated to comprise approximately
25% of the company's revenue and approximately 17%
of EBITDA. Those assets and cash flows would no longer be available
to support the company's current bondholders and the newly constituted
News Corp. will be moderately smaller in scale, and possess
less business and geographic diversity. Assuming the most adverse
scenario where all of the company's debt remains at News Corp.
and a contribution of cash estimated by Moody's to be between $1
and $2 billion, the transaction will increase News Corp.'s
debt-to-EBITDA leverage (LTM 3/31/12 incorporating Moody's
standard adjustments) to roughly 3.0x from 2.6x and reduce
its financial flexibility.
Moody's is nevertheless affirming News Corp.'s Baa1
rating. As the company is presently constituted, News Corp.
has significant financial flexibility and is positioned strongly within
the Baa1 rating category. The separation will weaken the company's
credit strength and financial flexibility, but not enough to warrant
downward rating pressure. Moody's anticipates the retained businesses
will have higher valuations, stronger growth prospects, and
face less secular revenue pressure than the publishing assets being separated.
Moody's also expects the retained businesses to grow their revenues
and EBITDA sufficiently over the period before the separation (approximately
12 months) such that upon completion of the separation, debt-to-EBITDA
leverage for News Corp. will be close to its current pre-separation
level.
Moody's believes that News Corp.'s management remains committed
to conservative financial policies and to its Baa1 credit rating,
including sustaining strong credit metrics and very strong liquidity levels
following the separation. As a result, the company will still
be well positioned for its rating despite the weakening, and Moody's
believes that it will maintain stronger liquidity on its balance sheet
than its closest Baa-rated peers. Also, the company
is still expected to maintain its sizable equity interests such as its
BSkyB stake, that are not factored into the aforementioned leverage
levels. Moody's expects free cash flow conversion to remain
strong, above the 35% threshold. The hit to free cash
flow may be less than that to EBITDA since the publishing segment accounts
for a much higher share of capital spending (an average of roughly 39%
of News Corp.'s consolidated total over the last three years).
It is unclear whether the separation will reduce News Corp.'s
exposure to lawsuits related to the UK phone hacking scandal in which
the company has been embroiled over the past year. Rupert Murdoch
is expected to remain Chairman and the controlling shareholder of both
companies. News Corp. plans to capitalize the new company
with a net cash position after the separation. Moody's believes
that the net cash together with free cash flow generation appears to position
the new company to have sufficient resources to fund liabilities associated
with the scandal.
Moody's does not anticipate material debt reduction in the near
future as News Corp. has less than $300 million of debt
maturing over the next 24 months, but roughly 10% projected
EBITDA growth for the retained assets should reduce pro forma leverage
over the next year and by the time the transaction closes. Moody's
also expects News Corp. will maintain a significant cash balance
(bolstered by free cash flow generation and completion of the sale of
NDS) of about $7-8 billion at the time of the separation
(vs. $10.7 billion of cash and cash equivalents at
3/31/2012) after funding acquisitions, share repurchases and the
cash contribution to the new entity. News Corp.'s
dividend payout remains low relative to its peers, at 17%
of pre-dividend free cash flow in 2011, and Moody's
believes the company may moderate share repurchase activity prior to the
separation to maintain flexibility.
The separation will negatively affect News Corp's business and geographic
diversity, which is an important factor supporting its rating.
The assets being considered for a separation include its newspaper publishing
operations in the US, the UK and Australia, its News America
Marketing business (free standing insert and in store marketing business)
as well as its smaller non-print related Australian businesses.
However, it will still have significant non-US operations
including DBS, television programming and film distribution operations
across Europe, Asia and Latin America, as well as equity interests
in BSkyB (39% owned) and Sky Deutschland (49.9% owned)
in Europe.
The transaction is expected to be in the form of a traditional separation,
with News Corp.'s shareholders expected to receive pro-rata
shares in the new company. The separation is subject to regulatory
and shareholder approvals, although News Corp.'s press release
did not indicate bondholder approval was necessary. The issuer
of the rated debt (News America Incorporated) and News Corporation,
the sole guarantor, are holding companies that sit above the assets
being separated with no revenue-generating assets or material assets
aside from cash and the investment in subsidiaries. Moody's
does not anticipate the separation will trigger the change of control
or "substantially all" provisions in the bond indentures.
As additional details related to the separation become available,
any further potentially negative changes to the asset mix could cause
Moody's to re-evaluate the parameters for upgrade or downgrade
thresholds for News Corp.'s ratings.
RATINGS RATIONALE
News Corp.'s Baa1 senior unsecured long term ratings (rated debt
resides at News America Incorporated, a subsidiary of News Corp.)
and stable rating outlook reflect the company's scale and leading market
positions in each of its core business segments and its strong debt protection
measures. The ratings are also supported by News Corp.'s
geographic and business diversity, with no business segment representing
more than 35% of total sales (on a pro-forma basis,
excluding the company's publishing segment). Moody's believes
that, over the long term, News Corp. will continue
to strengthen its competitive position as a large media conglomerate by
nurturing new business ventures and using its free cash flow generation
to make acquisitions. The rating recognizes the high cyclicality
of News Corp.'s earnings due to the company's material exposure
to advertising and consumer spending. News Corp.'s diversity
and liquidity profile helped the company weather the severe economic recession
in 2009 and maintain solid financial flexibility under tough operating
conditions. Management's consistent commitment to maintain a conservative
balance sheet along with the influence of Mr. Murdoch's increasingly
more conservative views on the credit profile provide incremental support
to the investment grade rating. The company typically manages leverage
below 3.0x, which is within the bounds of its rating category.
The stable rating outlook assumes that News Corp.'s operating performance
and cash flow generation will continue to remain strong, and leverage
will be sustained between 2.5x- 3.0x. Moody's
also expects that any debt-financed transactions will be followed
by subsequent de-leveraging within a reasonable period, and
that management will maintain a prudent posture towards shareholder-friendly
initiatives.
Upward rating pressure into the "A" category could result from a commitment
to maintaining stronger leverage and cash flow coverage metrics with debt-to-EBITDA
(including Moody's standard adjustments) under 2.25x (lowered from
2.50x previously) and free cash flow conversion in the 35%
to 40% range. However, Moody's will continue
to evaluate the company's pro-forma business profile to determine
whether more stringent credit metrics are necessary for a rating upgrade.
Moody's believes that the company has the discretion to impact its ratings,
but balances the opportunity for higher credit ratings with the desire
to maintain healthy financial flexibility and provide competitive returns
to shareholders.
A downgrade would occur if deviations from conservative financial policies
and aggressive debt-financed acquisitions, share buybacks
or dividend payments result in leverage sustained above 3.0x and
material declines in the company's cash balances, or free cash flow
conversion below 30%. Downward rating pressure could also
occur if the criminal probes and investigations result in wider spreading
evidence of wrongdoing that could materially impact confidence among the
company's advertising clients and consumers. Potential for material
changes in governance would be evaluated for continuity of the company's
commitment to its ratings and conservative credit profile.
The principal methodology used in rating News Corporation was the Large
Global Diversified Media Industry Methodology published in December 2010.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
Please see the ratings tab on News Corp.'s issuer page on Moodys.com
for the last rating action, rating history, and additional
details on its ratings.
News Corporation, with its headquarters in New York, is one
of the world's largest media companies with revenues of over $34
billion from a diverse portfolio of businesses.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating
Process page on www.moodys.com for further information on
the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
which some ratings were first released goes back to a time before Moody's
ratings were fully digitized and accurate data may not be available.
Consequently, Moody's provides a date that it believes is
the most reliable and accurate based on the information that is available
to it. Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has
issued the rating.
Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's affirms News Corp.'s Baa1 ratings, stable outlook following separation announcement
