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Announcement:

Moody's says Twenty-First Century Fox's announced sale of Sky Italia and its Sky Deutschland stake will not impact ratings

25 Jul 2014

New York, July 25, 2014 -- Moody's Investors Service said that Twenty-First Century Fox, Inc.'s ("FOX") announcement today that it has entered into a definitive agreement with British Sky Broadcasting Group plc ("BSkyB" -- Baa1 senior unsecured, ratings on review for downgrade) to sell its wholly-owned Sky Italia business and its 57.4 % ownership interest in Sky Deutschland, will not impact the company's Baa1 senior unsecured debt rating or the stable outlook. FOX will receive $9.3 billion in value from BSkyB comprised of $8.6 billion in cash and BSkyB's 21% interest in National Geographic Channels International, raising FOX's ownership interest to 73%. Also, FOX will participate in BSkyB's announced equity offering by purchasing $900 million of additional BSkyB's shares in order to maintain its 39.1% stake. The company will receive net after tax proceeds (factoring all elements of the transaction) of approximately $7.2 billion. Sky Italia and Sky Deutschland together represent FOX's entire Direct Broadcast Satellite Television segment, which contributed approximately 19% and 7% to the company's consolidated revenues and EBITDA in the LTM period ended 3/31/14.

Debt-to-EBITDA leverage was 3.1x as of 03/31/2014 (incorporating Moody's standard adjustments), factoring $750 million of prefunded debt maturing in December 2014. Pro forma for the transaction, that leverage will not be materially impacted by the reduction in EBITDA due to the reduction of consolidated debt located at Sky Deutschland as well as the reduced debt attributable to capitalizing satellite leases for both Sky Deutschland and Sky Italia. Moody's views the transaction as mildly credit negative for FOX due to the reduced potential direct access to predictable and less cyclical EBITDA and future free cash flows, while funded debt will likely remain largely unchanged. Notably, the DBS unit is chiefly a subscription based revenue model and receives fees for services provided via cable, satellite and broadband directly to customers in Italy, Germany and Austria. Accordingly, the transaction will lead to higher exposure to cyclical advertising spending and Moody's estimates that post the divestment, FOX's exposure to advertising will increase moderately from 27% to roughly 31% and pro forma consolidated revenues will decrease to around $25 billion from $31 billion for LTM 03/31/14. From a fundamental ratings perspective, we view the loss of revenues and earnings streams supporting bondholders as a credit negative in the absence of corresponding debt reduction. "However, in this transaction, negative credit ramifications are partly tempered when one considers FOX's 39% ownership interest in BSkyB, valued at approximately $9.5 billion" stated Neil Begley, a Moody's Senior Vice President. Even though FOX is parting with a valuable asset and will deconsolidate DBS from its operations, the company will effectively continue to retain a minority interest in Sky Italia and Sky Deutschland via its large minority ownership in BSkyB. In Moody's view, in the absence of debt repayments from the proceeds, reduction in earnings available to service debt at FOX will leave bondholders at a disadvantage as they will now have a deeply subordinated interest in the assets being sold, from the perspective of FOX's junior position in BSkyB's now leveraged capital structure.

To be sure, FOX's pro forma scale and portfolio of media assets which remains poised to continue strengthening, underscore its strong investment grade ratings. "But the real and long term credit implications from today's announced deal will largely depend on the company's planned future use of proceeds from the divestiture," stated Begley. Pro forma for the transaction, FOX has approximately $12.7 billion of cash on hand. Expected free cash flows over the next 12 months and significant pro forma cash on hand give FOX ample financial flexibility to choose its capital structure mix. We do not expect the company will use proceeds from the transaction to repay debt but Moody's cautions that prioritization of cash on hand for shareholder returns over deleveraging actions, resulting in debt leverage being sustained above the downgrade trigger of >3.0x over a prolonged period of time, could put pressure on the Baa1 rating. Based on management's track record of adopting conservative financial policies, we believe FOX will prudently use excess cash to balance shareholder and creditor interests, with a goal of maintaining its credit ratings. Further, the company could use proceeds to pursue earnings accretive growth opportunities and invest in existing business lines to solidify its market position. In light of FOX's recently announced unsuccessful bid to acquire Time Warner Inc. (Baa2 senior unsecured, stable outlook) for about $76 billion in a combination of stock and cash, the cash infusion from the sale of its DBS assets could allow the company to boost its offer to purchase Time Warner, without having to raise larger amounts of debt. As stated by Moody's in its Special Comment dated July 21, 2014, even if FOX comes back with a higher bid, it could possibly maintain its current credit ratings or perhaps a notch lower, provided it uses internal sources of cash and asset sale proceeds to offset acquisitions costs for a Time Warner takeover. "Pro forma cash on hand of $12.7 billion plus roughly $6 - $7 billion of net proceeds from potential asset sales such as CNN, could help provide FOX flexibility to fill the gap between its previous bid and Time Warner's expectations in order to get a deal completed," added Begley. Moody's believes that FOX would likely have to raise its offer to up to $105 per share or $93 billion to secure a deal. As stated by Moody's in its report, under such a scenario, the combined entity could still have a moderately leveraged balance sheet with solid credit metrics, indicative of a strong Baa rating. Moody's reiterates its view that management's commitment to the company's credit ratings continues to represent one of the most important rating factors in our assessment of financial risk profiles for large investment grade media companies, most of whom have adequate discretion in establishing their capital structures.

Twenty-First Century Fox, Inc., with its headquarters in New York, is one of the world's largest media companies with a diverse portfolio of businesses. FOX reports its businesses in five segments: Cable Network Programming (39% of LTM 3/31/14 revenues), Television (17%), Filmed Entertainment (29%), Direct Broadcast Satellite Television (19%) and Other, Corporate & Eliminations. Revenues for LTM 3/31/2014 were approximately $31 billion.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

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 C Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's says Twenty-First Century Fox's announced sale of Sky Italia and its Sky Deutschland stake will not impact ratings
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