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Rating Action:

Moody's confirms Disney's A2 senior unsecured long-term debt and P-1 short-term ratings; Outlook stable

08 Oct 2018

New York, October 08, 2018 -- Moody's Investors Service ("Moody's") confirmed The Walt Disney Company's ("Disney") A2 senior unsecured long-term debt and Prime-1 short-term ratings, thus concluding the review for downgrade initiated on June 20, 2018 after Disney raised its offer to purchase Twenty-First Century Fox's ("Fox", parent of wholly-owned subsidiary 21st Century Fox America, Inc.; Baa1, on review for upgrade) entertainment assets for $71.3 billion in stock and cash, plus the assumption of Fox debt. Moody's believes Disney will close the transaction with Fox in early 2019. Disney Enterprises Inc.'s A1 long-term debt rating was confirmed and all of the company's and its subsidiaries' shelf ratings were also confirmed as part of this rating action. The outlook is stable.

A summary of today's action follows:

Outlook Actions:

..Issuer: Disney Capital Trust I

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Disney Capital Trust II

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Disney Capital Trust III

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Disney Enterprises Inc.

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Walt Disney Company (The)

....Outlook, Changed To Stable From Rating Under Review

Confirmations:

..Issuer: Disney Capital Trust I

....Pref. Stock Shelf, Confirmed at (P)A3

..Issuer: Disney Capital Trust II

....Pref. Stock Shelf, Confirmed at (P)A3

..Issuer: Disney Capital Trust III

....Pref. Stock Shelf, Confirmed at (P)A3

..Issuer: Disney Enterprises Inc.

....Senior Unsecured Regular Bond/Debenture, Confirmed at A1

..Issuer: Walt Disney Company (The)

....Senior Unsecured Shelf, Confirmed at (P)A2

....Subordinate Shelf, Confirmed at (P)A3

....Senior Subordinate Shelf, Confirmed at (P)A3

....Junior Subordinate Shelf, Confirmed at (P)A3

....Pref. Shelf, Confirmed at (P)Baa1

....Senior Unsecured Bank Credit Facility, Confirmed at A2

....Senior Unsecured Commercial Paper, Confirmed at P-1

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

....Senior Unsecured Regular Bond/Debenture, Confirmed at A2

RATINGS RATIONALE

The Walt Disney Company's ("Disney") A2 senior unsecured debt ratings and Prime - 1 short-term rating reflect its position as the world's largest media conglomerate with a diverse portfolio of powerful brand names and iconic media assets with long operating histories. Disney's large scale and highly diversified revenue streams lead to sizeable annual free cash flow generation and strong credit metrics. The rating also captures the company's exposure to cyclical consumer spending pressures and volatility of its film businesses. These risks are somewhat tempered by Disney's vast geographic and product diversity that are supported by its track record of investing in strategic initiatives across multiple platforms, while profitably growing its established assets. The company's credit profile derives considerable support from Disney's content production capabilities and its leadership in utilizing existing and new technological distribution platforms. The ratings also reflect management's commitment to Disney's investment grade and short-term ratings, along with the company's history of adopting conservative financial policies which provide incremental support to the A2 and Prime-1 ratings. In our opinion, prudent balance sheet management on the part of the company and its ability to generate robust cash flows allow it to maintain solid financial flexibility and competitive advantages over the long-term, while pursuing acquisitions and distributing significant amounts of cash to shareholders.

The confirmation is based upon:

1) Moody's belief that Disney is best positioned and far ahead among the traditional media companies as it strategically will possess the scale and ingredients necessary to position it well in the evolving television entertainment ecosystem. It has established streaming technology via its 75% ownership stake in BAMTech, it owns significant global brands and franchises, and with the Fox acquisition, it will own significant production capability and have SVOD platforms already established in some large markets;

2) Disney generates strong and growing free cash flows which gives it the capability to pay down debt quickly;

3) Disney has a long history of conservative and consistent financial policies. We believe that management is highly committed to sustaining its A2 long-term debt ratings and will prioritize debt repayment over purchasing its stock until historical lower levels of leverage are restored. Therefore, we anticipate that the company will reduce the higher leverage associated with the assumption of Fox's debt and will return its credit metrics to historical levels consistent with its A2 credit rating within 12 to 24 months following the close of the acquisition; and

4) Moody's expects cash proceeds from the sale of Fox's 39.12% Sky plc stake and from the sale of Fox's regional sports networks will be used to repay much of the debt borrowed to finance the Fox assets being acquired.

Disney's winning bid of $71.3 billion to acquire various entertainment assets of Fox, which is expected to be financed with 50% stock consideration and 50% cash consideration, along with the assumption of all of Fox's debt, will result in temporarily elevated gross debt/EBITDA leverage of around 2.7x (including Moody's adjustments) pro forma for FY 2019. This is above the 2.25x sustained leverage threshold that we believe is appropriate for the company's A2 long-term debt ratings. However, as a condition of the transaction approval, the Department of Justice ("DOJ") requires Disney to dispose of Fox's regional sports networks ("RSN") within 90 days of the acquisition closing (with one possible 90-day extension). With Disney's consent, Fox is also in the process of selling its 39.12% stake in Sky plc (Baa2, on review for upgrade) for approximately $15 billion in cash. We expect these two sales to generate almost $30 billion in cash, which will be used to offset much of the $35.7 billion cash consideration for the Fox acquisition. As part of the purchase we anticipate that Disney will also assume Fox's debt which was $19.5 billion as of 6/30/18. We expect the combined company to generate between $8 and $9 billion of free cash flow annually, after accounting for approximately $2 billion in achievable synergies.

Overall, Disney is expected to increase debt by around $5 billion as a direct result of financing this transaction, net of the proceeds from the Sky and RSNs sale, and Fox's cash on hand. However, the increase in Disney's leverage is driven in large part by the acquisition of a higher-leveraged entity. Fox's debt/EBITDA for LTM 6/30/18 was 2.9x, including Moody's adjustments. But Disney is not acquiring all of Fox's businesses. It will not include the Fox Broadcast Network and its owned and operated station group, and it will also exclude Fox News as those assets will be spun off. Without these assets and cash flows, Disney is really acquiring Fox at over 4.0x leverage. However, after synergies are achieved, we estimate that the Fox assets would be leveraged at over 3.0x instead. Even still, this is the main cause for the temporarily higher leverage. We believe that Disney can achieve $2 billion of cost synergies as these two entities overlap in almost all of Disney's business segments.

Over the near-to-intermediate-term, Moody's remains concerned over changes in television consumption impacting the pay TV ecosystem in the US. We anticipate continuing losses in pay TV subscribers on its broadcast and cable networks. We believe that increasing investment in both streaming technology and especially in original content are necessary, with a focus on transitioning from linear television distribution to subscription video on demand with potential ad-support becoming the consumer video platform of choice over the long term.

The strategic benefits to Disney for its acquisition of Fox's entertainment assets include access to a large library of desirable content, its 30% stake in Hulu (which will give Disney 60% ownership and majority control) and the operational synergies that are achievable between the two companies. We believe Fox's assets give Disney enough content to further develop and deploy its direct-to-consumer subscription-video-on-demand (SVOD) strategies that was initiated earlier this year with the release of ESPN+. Moody's believes that over the long-term linear television networks will continue to face secular declines, and SVOD and hybrid SVOD/Linear (HSVODL) platforms will replace networks as far as consumers are concerned. We believe the company is the best positioned for success among all of its peers to achieve the transition.

From an organizational perspective, Disney is expected to acquire Fox by putting in place a new holding company (New Disney) which will own both Disney and Fox. At closing, it will be renamed The Walt Disney Company, and in the future, it will be the issuer of all new debt. In order to simplify the credit structure and avoid material structural subordination issues affecting the company's credit ratings, the company plans to put in place cross guarantees between Disney and New Disney, such that their senior unsecured indebtedness will be pari passu and all rated A2. Disney has also announced that it has launched an obligor exchange for all of Fox's bonds outstanding. Disney is offering to exchange New Disney bonds for all of Fox's bonds. We expect Fox bond holders to benefit from the exchange as the new bonds will be rated the same as Disney's current A2 rating. In the event that any Fox debt is not exchanged and therefore remaining at Fox, a number of factors will be considered when we conclude the review for upgrade on the Fox bonds, such as: (1) whether Fox will issue ongoing financial statements; (2) the amount of debt leftover, the assets that will remain legally within the Fox entity and its subsidiaries and their ability to service that debt; and (3) the impact of A2-rated Disney and New Disney's implicit support for unguaranteed but wholly-owned Fox subsidiary. If debt remains at Fox and Disney is no longer required to file financial statements at that level, and the company does not provide Moody's with audited Fox financial statements, then we would likely withdraw the ratings at Fox. We do not expect that Fox would be an issuer of any debt in the future.

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 suspend share repurchases until leverage is reduced to about 2.25x or less within 12-24 months of the closing of the acquisition of Fox's entertainment assets.

Moody's would consider an upgrade of Disney's A2 rating if debt-to-EBITDA (including Moody's adjustments) leverage is sustained below 1.5x and free cash flow-to-EBITDA 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. A downgrade could occur if management adjusts its financial policy, becoming less conservative and does not remain committed to keeping leverage below 2.25x (including Moody's adjustments), or if the company underperforms such that 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 LTM 06/30/2018 revenues): Media Networks (41%), Parks and Resorts (34%), Studio Entertainment (16%), Consumer Products and interactive (8%). Consolidated revenues for the last twelve months (06/30/2018) were $57.9 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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