Fitch Ratings has affirmed the 'BBB+' Issuer Default Ratings (IDRs) of Twenty-First Century Fox, Inc. (FOXA) and its wholly owned subsidiary 21st Century Fox America, Inc. (21CFA). Fitch has also affirmed the specific issuer ratings assigned to 21st Century Fox America, Inc. The Rating Outlook remains Stable.
Approximately $20.2 billion of debt outstanding as of Sept. 30, 2014 is affected by Fitch's action. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
--FOXA's portfolio of cable networks, including regional sports networks, and leading brands underpin the ratings. Fitch believes these businesses position the company with solid growth prospects and the ability to generate meaningful levels of free cash flow (FCF).
--Fitch expects that FOXA will use its excess liquidity to further reinvest in its core businesses and growth initiatives while supporting shareholder returns within the context of managing to its leverage target ranging between 2.5x and 3.0x.
--Shareholder returns (dividends and stock repurchases) that exceed FCF generation are incorporated into current ratings, to the extent that leverage remains below Fitch's 3x total leverage threshold.
--FOXA's liquidity position and financial flexibility remain strong for the rating. Fitch anticipates FOXA will generate annual FCF in excess of $2 billion during the rating horizon.
--FOXA is well positioned to address the secular threats and opportunities presented by emerging alternative distribution platforms and continued audience fragmentation across the media and entertainment landscape.
Fitch holds FOXA's overall strategic positioning in high regard as its businesses consist of a strong collection of cable and regional sports networks, leading television and film studios, national television network with robust sports-programming rights, and local television broadcast. Each of FOXA's businesses have the scale characteristics to operate at high margins and generate meaningful levels of free cash flow (FCF) and positions the company to address the secular threats and opportunities presented by changing media consumption patterns and continued audience fragmentation across the media and entertainment landscape. Fitch believes these businesses position the company with solid growth prospects and the ability to generate meaningful levels of FCF, and balanced against the risks inherent within the company's operating profile, place the company solidly within Fitch's parameters for a 'BBB+' rating.
FOXA's decision to sell its European (DBS) businesses, consisting of its 57.4% ownership stake in Sky Deutschland AG and its wholly owned subsidiary Sky Italia SRI to British Sky Broadcasting Group plc in a transaction valued at approximately $8.8 billion enhances the company's overall financial and strategic flexibility and will not have a material impact on the company's credit profile. Consideration for the sale, which closed November 2014, consisted of $8.2 billion of cash and BSkyB's 21% interest in NGC Network International LLC and NGC Network Latin America LLC (collectively National Geographic Channels International). The transaction increases FOXA's ownership stake in National Geographic Channels International to 73% and generated approximately $8.1 billion of net cash proceeds.
FOXA's financial priorities remain consistent. The company's leverage target, ranging between 2.5x and 3.0x along with the FOXA's $6 billion share repurchase program highlight its capital allocation policy. FOXA is capitalizing on the capacity and flexibility within its balance sheet and intends to repurchase $6 billion of its common stock during fiscal year 2015 reflecting an increase from the $4 billion repurchased during fiscal 2014. FOXA reiterated its intention to repurchase $6 billion of its common stock during its fiscal year 2015 following the close of the sale of its European DBS business. Outside of potential merger and acquisition activity, Fitch expects that FOXA will continue investing in its core businesses and growth initiatives and support shareholder returns within the context of managing to its leverage target. Shareholder returns that exceed FCF generation are incorporated into current ratings, to the extent that leverage remains below Fitch's 3x total leverage threshold.
FOXA's capital structure and credit protection metrics remain stable and within Fitch's expectations for the current rating. Consolidated leverage as of the latest 12 months (LTM) period ended Sept. 30, 2014 was 2.86x. Fitch estimates leverage, pro forma for the expected repayment of 21CFA's $750 million of senior unsecured note due Dec. 2014 is 2.75x. Fitch expects leverage will range between the company's 2.5x to 3.0x leverage target during the rating horizon.
Fitch believes that FOXA's liquidity position and financial flexibility are strong for the rating given the strength of its businesses and expected FCF generation. The company generated approximately $1.6 billion of FCF during the LTM period ended Sept. 30, 2014. FCF generation is pressured somewhat due to the company's increased investment in new channel launches, original programming, and higher costs to acquire programming (including sports programming) across the company's portfolio of cable and television networks. Fitch expects these investments will remain among the company's key priorities during its fiscal year 2015 before normalizing somewhat during fiscal 2016.
The company's liquidity position is supported by existing cash balance totaling $4.7 billion as of Sept. 30, 2014 ($1.1 billion held by foreign subsidiaries as of June 30, 2014) and the borrowing capacity from its $2 billion revolver which expires May 2017. Fitch estimates the company's cash balance is approximately $12.7 billion pro forma for the sale and is significantly higher than its previously articulated target cash balance ranging between $2 and $3 billion. Fitch anticipates that excess cash will be utilized over time to support tuck-in acquisitions and incremental shareholder distributions.
Scheduled maturities are well-laddered and manageable considering FCF, reliable market access and back-up liquidity. Upcoming maturities total $200 million due during fiscal 2016 (7.6% senior debentures due Oct. 2015), and $400 million due during fiscal 2017 (8% senior debentures due October 2016).
FOXA is well positioned to address the secular threats and opportunities presented by emerging alternative distribution platforms and continued audience fragmentation across the media and entertainment landscape. The alternative distribution platforms generate incremental demand for high-quality content across all major end-markets (broadcast, cable networks and subscription video on demand) and large, well-capitalized content providers, such as FOXA, will remain crucial to the industry. The ratings incorporate expected earnings volatility generated by the company's Filmed Entertainment segment, given the general hit-driven nature of the movie industry.
RATING SENSITIVITIES
Positive: Positive rating action would likely coincide with FOXA adopting a more conservative financial policy highlighted with a gross leverage target of 2x or lower. Meanwhile, FOXA will need to demonstrate that its operating profile can sustain itself amidst ongoing competitive pressures, changing media consumption patterns and evolving technology platforms.
Negative Rating Trigger: Negative rating actions are more likely to coincide with a material shift in financial policy including, but not limited to, the company adopting a more aggressive financial strategy or event-driven merger and acquisition activity that drive leverage beyond 3x in the absence of a credible de-leveraging plan while exhausting excess cash balances. A negative rating action based solely on operational performance is unlikely over the short term.
Fitch has affirmed the following ratings with a Stable Outlook:
Twenty-First Century Fox, Inc.
--IDR at 'BBB+'.
21st Century Fox America, Inc.
--IDR at 'BBB+';
--Senior unsecured at 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=966895
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
