BSkyB Has Ratings Wiggle Room in Deal Tripling Debt: U.K. Credit

British Sky Broadcasting Group Plc could triple its debts to acquire the Italian and German pay-TV assets of 21st Century Fox Inc. without jeopardizing its investment-grade ratings, according to CreditSights Ltd.

“BSkyB’s leverage at the moment is very low, it’s comfortably within their current ratings limits,” Mary Pollock, an analyst at CreditSights, said in an interview yesterday. “People think of them as being financially conservative, but their stated target is only to remain investment grade, which gives them a lot of flexibility.”

London-based BSkyB, 39 percent owned by Fox, the U.S.-based film and television company controlled by Rupert Murdoch, said May 12 it’s in talks to take control of satellite and cable broadcasters Sky Italia and Sky Deutschland AG. The proposed purchase, which would be BSkyB’s largest, may cost the company 10 billion euros ($14 billion), according to people with knowledge of the matter.

The cost of insuring BSkyB debt against default has risen since Bloomberg first reported the discussions on May 9, data compiled by Bloomberg show.

The broadcaster, whose debt is rated three levels above junk by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, had net debt of 1.54 billion pounds ($2.6 billion) at the end of March and benefits from one of the lowest leverage levels in the industry.

Debt Ratio

Its ratio of net debt to earnings before interest, taxes, depreciation and amortization is 0.97, according to data compiled by Bloomberg. The burden could rise to about three if the deal goes ahead, according to estimates from Berenberg Bank.

That compares with an industry average of 2.3, while John Malone’s Liberty Global Plc, which is also buying European cable assets, has a debt-to-Ebitda ratio of 5.6.

While BSkyB may have more room to maneuver than its peers, the company will probably cut back on spending its cash by discontinuing share buybacks, Pollock said. The company spends 2 billion pounds a year on content and broadcast rights and reported free cash flow of 1.32 billion pounds in the year ended June last year.

“If they do it, this is a real game changer for them,” Pollock said. “They would really halt that shareholder remuneration. The U.K. pay-TV market is more mature, but they’re going to have to invest in the German and Italian markets to build a strong position and to start seeing consistent growth.”

Recommendation Downgrade

CreditSights downgraded its recommendation on BSkyB to underperform from market perform, according to an e-mail today. Pollock said the jump in BSkyB’s swaps reflect the increased probability that a deal will be announced.

Credit-default swaps on BSkyB jumped to 79 basis points today, the highest level since June, according data compiled by Bloomberg. BSkyB bonds maturing in 2022 yielded 110 basis points more than benchmark debt yesterday, up from 91 basis points at the end of last week.

Eleanor Mills, a spokeswoman for BSkyB, said that the discussions are still preliminary and no terms have been reached, declining to comment further.

European Unity

BSkyB’s bid follows an attempt by Murdoch to unite the European businesses in 2010. Murdoch, who at that time oversaw the combined News Corp. and Fox businesses, attempted to buy the remaining 61 percent of BSkyB. The bid was dropped the following year as his news operations in the U.K. came under political and public attack over phone-hacking allegations.

For that reason, the options for the current talks are more limited. Murdoch can’t let his holding in BSkyB rise above 39 percent, or he’ll trigger rules that would force him to make an offer for the entire company, something policy makers in the U.K. probably would oppose, said Sarah Simon, an analyst for Berenberg.

That means that Fox would likely limit itself to taking a 39 percent stake in any equity raised, keeping its holding at the same level, she said. BSkyB may need to come up with 2.75 billion pounds in equity to finance the deal, she said.

“Making a bid now would stir up the wrath of the media again, rendering life very difficult,” Simon said. “We do not believe that Fox is preparing to take out the minorities in BSkyB, and thus the group will be limited to taking only a 39 percent share in whatever equity is issued by BSkyB to fund the transaction.”

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