CORRECTION TO HEADLINE:MOODY’S DOWNGRADES THE WALT DISNEY COMPANY'S SENIOR UNSECURED DEBT RATING TO A3 FROM A2, AND DOWNGRADES ITS SHORT TERM RATINGS TO P-2 FROM P-1. THE OUTLOOK IS STABLE
New York, September 27, 2001 -- Moody's Investors Service has downgraded the senior unsecured debt ratings of The Walt Disney Company to A3 from A2, and has downgraded its short term rating to P-2 from P-1. The long-term ratings for ABC Inc. and Disney Enterprises Inc. have been downgraded to A2 from A1. The outlook is stable, although that outlook may be revised to negative if Disney does not take steps to de-leverage its balance sheet near-term. This concludes the rating review initiated on July 23, 2001.
The downgrade results from the cumulative effects of the significant leverage increase resulting from the pending $5.3 billion Fox Family Worldwide acquisition, a substantial amount of stock repurchase activity recently, and Moody's expecation that Disney's parks, networks, and consumer products divisions will face significant pressure on performance over at least the next 12-18 months. However, the stable outlook assumes that management will seek to mitigate operating and financial concerns with asset sales, cost containment initiatives, more aggressive capital conservation, and delevering corporate finance strategies that will improve balance sheet strength in the near term. In the event that hybrid securities are used to achieve these objectives, they will be evaluated in the context outlined in Moody's rating methodology for hybrid securities. If Disney proceeds with a debt-financed approach to fund the Fox Family acquisition and does not otherwise take meaningful credit-positive measures, the A3 rating will remain under significant pressure, and the appropriateness of the stable outlook will be revisited.
By repurchasing shares in the days following September 11, management demonstrated a willingness to defend share price versus the interests of its bond holders, increasing Moody's concern over the risk of further repurchases. Longer term, Moody's remains concerned that Disney may continue to make additional debt financed acquisitions to maintain its position among peer companies, while the use of equity is hampered by weak stock performance.
The declining operating performance of Disney's network division is a result of both uncontrollable factors, i.e. general advertising weakness and the Trade Center Attack; and controllable factors, i.e. over-reliance at ABC on a narrow line up of hit shows, some of which have lost substantial rating share during 2001. During the week of September 11, ABC operated commercial free for four days, and subsequently advertisers have been slow to return to broadcast television. Moody's is concerned that future national events or emergencies may cause similar elimination and disruption of advertising. This comes on top of an advertising environment that was already weak in 2001 and, in Moody's view, likely to remain weak in 2002 as well. While ABC is seeking to reinvigorate its program lineup, new program launches are expensive and take a while to build a following. Moody's believes that in an increasingly fragmented environment programming weakness leaves a network vulnerable. Moody's expects that continued cost pressure from sports and entertainment programming will exert pressure on margins.
Park attendance is economically sensitive and had shown signs of weakness prior to September 11. The adverse impact of the attack on travel and tourism is substantial, and directly impacts its destination park attendance and their surrounding resort properties. Moody's is concerned that subsequent threats or attacks will further slow attendance recovery. Moody's believes that Disney can and will take dramatic steps to reduce operating costs in the parks and resorts business to moderate the impact, but still believes that the performance trend for the business will be negative near-term despite these measures. Separately, weakening consumer confidence will challenge the restructuring and revitalization of its Consumer Products division.
Disney's leading franchises in family entertainment, film, broadcasting, and its valuable content library support its rating. Disney ranks among the four largest global media and entertainment companies, and enjoys both geographic and line of business diversity. Its brand is unrivaled in children's and family entertainment. Its long-term conservative approach to acquisitions and use of debt are also considered. Over the long term its franchise can be expected to continue to generate substantial free cash flow driven by its network operations, completion of international park expansions, and controlled investment in film. In a normalized environment the expansion of its global parks can be expected to lift cash flow, and allow a reduction of associated capital expenditures.
Moody's expects that Disney will be able to integrate and improve the operating performance of Fox Family Worldwide by infusing it with Disney and ABC content. However, it will be challenged to meet the high targets required to fully justify the high purchase multiple. Moody's recognizes the strategic importance of Fox Family Worldwide to Disney in light of its 81 million cable and satellite television subscribers throughout the U.S.; a 76% interest in Fox Kids Europe, which reaches more than 24 million subscribers across Europe; Fox Kids channels in Latin America, and the Saban library and entertainment production businesses.
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