S&P Cuts Dow Jones Credit Rating
On Jan. 20, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Dow Jones & Co. (DJ ) to A- from A and its short-term corporate credit and commercial paper ratings to A-2 from A-1. These ratings were removed from CreditWatch, where they were listed Nov. 15, 2004.
The ratings outlook is stable. About $600 million of funded debt was outstanding as of September, 2004, pro forma for Dow Jones's pending acquisition of financial and investing news Web site MarketWatch (MKTW ).
The lower ratings reflect Dow Jones's weaker pro forma financial profile, attributable to the planned $463 million (net) MarketWatch acquisition. The transaction is expected to increase Dow Jones's reach and scale in online financial news markets. However, the company expects to fund the purchase with up to $400 million in incremental debt, including commercial paper borrowings and a bond issuance.
Adjusted for operating leases, pro forma debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) is in the mid-2-times area, up from the mid-1-time area. While Dow Jones is expected to focus on integrating MarketWatch and reducing its debt levels in the near term, S&P expects the company to continue to look for investment opportunities.
The ratings on Dow Jones reflect the New York City-based company's position as the leading supplier of U.S. business news and its historically conservative capital structure. These factors are tempered by the increased pro forma debt levels due to the planned MarketWatch purchase, high volatility of revenues and cash flow resulting from dependence on the Wall Street Journal's domestic operations and the Journal's still challenging business conditions.
The print-publishing segment, which consists primarily of the Journal, accounted for roughly 70% of revenues and EBITDA in 1999 and 2000. Other operations include electronic publishing and community newspapers. However, as a result of the advertising revenue downturn at the Journal beginning in 2001, print publishing represented roughly 60% of revenues and 30% of EBITDA over the 2002-04 period. The overall advertising climate has been recovering, although segment trends are mixed. Consolidated revenues total about $1.7 billion.
Dow Jones suffered a more substantial deterioration in its revenues and cash flow than other newspaper publishers due to the soft economic conditions and the Journal's heavy reliance on financial and technology advertising. To help offset this weakness, the company instituted major cost-reduction programs. In addition, Dow Jones has benefited from improved electronic-publishing and community-newspaper contributions.
Quarterly advertising linage growth turned positive in the 2003 third quarter and continued through the 2004 second quarter. However, third-quarter 2004 linage declined. Monthly and category volumes have been uneven. Following the completion of a major print expansion project in 2001, capital spending has been at significantly lower levels.
Pro forma debt to EBITDA is in the mid-2-times area. Further adjusting for debt-like unfunded post-retirement medical plan liabilities (2003 yearend valuation), debt to EBITDA is in the low-3-times area. S&P expects Dow Jones's overall financial profile to strengthen in the near term through a combination of lower debt and higher cash flow levels, as the advertising environment recovers. The company's share-repurchase program has been suspended since mid-2003, when Dow Jones completed the acquisition of a Stockton (Calif.) newspaper for $144 million in cash. In March, 2004, it acquired Alternative Investor Group for $85 million in cash.
Outlook: The outlook is stable. Dow Jones's financial profile is expected to strengthen to levels more appropriate for the A- corporate credit rating over the next 12 to 18 months as the company focuses on integrating the MarketWatch operations and using its discretionary cash flow for debt reduction. In the longer term, Standard & Poor's expects Dow Jones to continue to look for other investment opportunities to diversify its revenue and cash-flow base.
From Standard & Poor's Ratings Services