On Sept. 22, Standard & Poor's Ratings Services raised its ratings on News Corp. (NWS), including an upgrade of the corporate credit rating to BBB from BBB-, reflecting strengthened credit measures, good intermediate-term growth prospects, diminished concerns over a large share buyback transaction with Liberty Media (L), and expectations that this rating level will afford the company the appropriate flexibility to pursue its growth objectives.
The media concern's recent Internet acquisition announcements and the potential for further such acquisitions don't significantly alter either the financial or business risk profile. Credit measures are strong and the outlook is stable. Total debt as of June 30, 2005, was $9.5 billion, excluding exchangeable securities.
The ratings reflect News Corp.'s standing as one of the most globally diversified of the major media companies as well as its moderate financial profile. It has strong market positions in broadcast TV, cable-TV programming, newspaper publishing, newspaper inserts, and filmed entertainment, and significant investments in satellite direct-to-home businesses in the U.S., Britain, and Italy. News Corp. has been an active acquirer and has launched, on its own or with partners, a number of entertainment programming and distribution businesses.
WINNING PLAYS. News Corp.'s existing TV network, local TV stations, cable networks, and newspaper businesses face tough competition. Nevertheless, the company's reported earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 22% in the fiscal year ended June 30, 2005.
Key factors were strong feature-film performance, supplemented by DVD momentum; robust advertising and subscriber growth trends in cable-network programming; and a moderate increase in newspaper earnings driven by the consolidation of Queensland Press, the weakening of the U.S. dollar, and ad-sales growth. The U.S. TV business had lower earnings because of programming cost challenges, which weren't entirely offset by the more than doubling of operating income at Star TV in Asia.
News Corp. has undertaken numerous investments -- the Fox News Channel and Star TV being important recent examples -- which have involved financial and operating risk but are now generating healthy profits and competitively well positioned. Recently announced plans to acquire Internet outfits Intermix Media (MIX) and IGN Entertainment now pose operating risk, notwithstanding good long-term growth opportunities. News Corp. also is contemplating investments in additional cable-TV networks, a direct-to-home service in India, and further Internet investments.
NET HORIZON. The risk surrounding a possible transaction to reduce Liberty's voting stake of roughly 18% in News Corp. appears less immediate, although Standard & Poor's is sensitive to the magnitude of Liberty's voting stake in the company. Liberty's total equity stake in News Corp. was valued at more than $8 billion as of June 30, 2005.
Separately, although recent Internet-related acquisition plans, totaling $1.36 billion, represent a new strategic endeavor that lies somewhat outside the company's mainstream businesses, the amounts involved are well within News Corp.'s means. Share repurchase plans and a higher dividend level also are reasonable at this rating level.
Liquidity: News Corp. has strong liquidity. Acquisition and investment funding in recent years has been well balanced between debt, equity, and cash. Cash balances have been in the range of $2 billion to more than $5 billion during the past five years, and stood at nearly $6.5 billion as of June 30, 2005, before completion of recently announced acquisitions and asset sales.
News Corp.'s principal credit facility is a $1.75 billion revolving credit maturing June, 2008, and has only been used for letter of credit issuance. News Corp.'s debt maturities are appropriately spread, with no given year's maturities exceeding free cash flow before dividends paid.
Outlook: A stable outlook anticipates that News Corp. will maintain current healthy earnings-growth trends, and will reinvest in its business while also pursing acquisitions and share repurchases. The rating assumes this could consume a meaningful portion of the company's cash balances and possible debt capacity.
A revision of the outlook to positive depends on the evolution of management's financial strategy. Management currently believes its objectives are best served with the flexibility that a BBB corporate credit rating provides. Revision of the outlook to negative isn't considered likely but could occur in the event of a dramatic, unexpected reduction of liquidity, or a derailment of operating trends.
From Standard & Poor's Ratings Services