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Rating Action:

Moody's affirms Disney's A2/Prime-1 ratings following 21st Century Fox acquisition agreement; outlook is stable

14 Dec 2017

New York, December 14, 2017 -- Moody's Investors Service ("Moody's") affirmed The Walt Disney Company's ("Disney" or "the company") A2 long-term senior unsecured debt ratings and P-1 short-term commercial paper rating following the announcement to acquire various assets from Twenty-First Century Fox, Inc. ("FOX") for approximately $66 billion, including the assumption of all of Fox's debt, which represents an 8.7x synergy-adjusted FY 2018 EV/EBITDA multiple based on Disney's closing share price on December 13, 2107 . The assets Disney will acquire include FOX's general entertainment cable networks, film studio, international assets such as its 39% stake in Sky plc (Baa2, developing outlook) and regional sports networks ("RSN's"). Disney is expected to fund the acquisition with 100% equity totaling approximately $52 billion. Additionally, Disney anticipates that it will acquire the remaining 61% of Sky plc that is not yet owned by FOX which Fox currently has a definitive agreement to acquire. This stake which will be financed entirely with debt. Both transactions, Disney-FOX and FOX-Sky, will be subject to regulatory approval and what was proposed today could change materially after regulatory review. Disney expects to close the transaction for FOX's assets in 12-18 months. Disney also expects the FOX-Sky transaction to be completed prior to their acquisition of FOX's assets, though we believe that transaction could be delayed further by new process surrounding Disney's probable ownership. Disney's outlook remains stable.

A summary of today's action follows:

Outlook Actions:

..Issuer: Disney Capital Trust I

....Outlook, Remains Stable

..Issuer: Disney Capital Trust II

....Outlook, Remains Stable

..Issuer: Disney Capital Trust III

....Outlook, Remains Stable

..Issuer: Disney Enterprises Inc.

....Outlook, Remains Stable

..Issuer: Walt Disney Company (The)

....Outlook, Remains Stable

Affirmations:

..Issuer: Disney Capital Trust I

....Pref. Stock Shelf, Affirmed (P)A3

..Issuer: Disney Capital Trust II

....Pref. Stock Shelf, Affirmed (P)A3

..Issuer: Disney Capital Trust III

....Pref. Stock Shelf, Affirmed (P)A3

..Issuer: Disney Enterprises Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed A1

..Issuer: Walt Disney Company (The)

....Senior Unsecured Shelf, Affirmed (P)A2

....Senior Subordinate Shelf, Affirmed (P)A3

....Subordinate Shelf, Affirmed (P)A3

....Junior Subordinate Shelf, Affirmed (P)A3

....Preferred Shelf, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debentures, Affirmed A2

....Senior Unsecured Bank Credit Facility, Affirmed A2

....Senior Unsecured Commercial Paper, Affirmed P-1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A2

RATINGS RATIONALE

We anticipate that the Fox operations being acquired will provide Disney with many opportunities to expand and grow. Those opportunities include: significant revenue and cost synergies; significantly increased content production and significantly enhanced content library in the face of post-maturing consolidating markets and disruption from strong new digital competitors; strengthening direct-to-consumer (DTC) prospects with global brands; Provides ESPN with local sports programming and worldwide presence to extend the strength of its brand; broader international distribution of Disney's other important brands and properties in Europe and Asia through Sky in Europe and Star in Asia; greater strength in television programming production; onboarding important Marvel intellectual properties (i.e. the expansive X-Men, Fantastic Four, and Deadpool franchises) licensed to Fox before Disney's acquisition of Marvel, Fox's Avatar film franchise -- already licensed to Disney's Animal Kingdom theme Park, a Fox-owned Star Wars property (Star Wars IV), where Disney commands greater 360 degree revenue opportunities through its powerful consumer products segment, future DTC subscription-video-on-demand services and in Disney's theme parks; and much needed ownership consolidation and majority control of Hulu as compared to the fragmented ownership structure which in our view, has resulted in self-interest strategic conflicts and missed opportunity which comes with it.

We expect Disney's leverage to rise to about 3.0x (currently 1.7x FYE 2017; including Moody's adjustments) at the close of the transaction, including the assumption of the $20 billion of debt at FOX (excluding any positive impact from a reduction in US corporate tax rates) and pro forma for the debt associated with FOX's pending acquisition of the 61% stake in Sky that it does not own, which we consider very high for the A2 rating. To reduce the dilutive impact of the transaction, the company intends to repurchase about $10 billion of its shares between now and the close of the transaction, and another $10 billion over approximately two years after the close in the transaction. This will contribute to the higher leverage metric and slower decline in leverage after the transaction close. We believe that it does provide the company with more financial flexibility for unforeseen shortfalls or other negative events that could otherwise hamper the company from restoring credit metrics as compared to financing the acquisition with $20 billion of additional debt upfront and an equally lower amount of equity, which we believe is the company's ultimate intent.

The affirmation of the credit ratings is based on Moody's view that if the acquisition is approved and completed as proposed, the company will be able to quickly reduce leverage through a combination of synergies and organic EBITDA growth. We believe that the company's financial policy, including its sustained leverage target, is unchanged. Additionally, the company's added scale, as well as broader business and geographic diversity and reach better positions the company in an evolving media landscape. Today's action incorporates our expectation that Disney's total debt will increase by about $20 billion for the assumed FOX debt and $24 billion if it were to complete the acquisition for Sky's remaining 61% equity, for a total of $44 billion. We expect Disney's leverage to return to a range in line with its A2 rating within 24 months of the transaction close and that the company remains committed to sustaining its A2 investment grade rating.

The stable outlook reflects our view that Disney will continue to reinvest in its businesses to sustain its competitive position and cash flows, and manage its credit profile commensurate with the A2 long-term debt rating. The outlook also reflects our assumption that Disney will manage share buybacks, dividends and acquisitions while integrating FOX's assets with an expectation that leverage will be reduced to about 2.0x or less within 24 months of the transaction closing.

Moody's would consider an upgrade of Disney's A2 rating if debt/EBITDA leverage (Moody's adjusted) is sustained under 1.5x and EBITDA/FCF (Moody's adjusted) is above 35%. A strong commitment from the company's management and board of directors to these stronger metrics would also be necessary for consideration of a higher rating. Moody's would consider a downgrade of Disney's A2 rating if management does not remain committed to sustaining leverage at or below 2.0x, or if the company underperforms such that it is unable to reduce leverage.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The Walt Disney Company ("Disney"), with its headquarters in Burbank, California, is a diversified worldwide media and entertainment company operating under four main business segments (as a percentage of FYE 2017 revenues): Media Networks (43%), Parks and Resorts (33%), Studio Entertainment (15%), Consumer Products and Interactive (9%). Consolidated revenue for FYE 2017 was $55.1 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit 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: 1 212 553 0376
Client Service: 1 212 553 1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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