TEXT - S&P affirms News Corp ratings

Fri Nov 30, 2012 3:52pm EST

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Overview
     -- We have concluded our review of News Corp.'s management and governance 
following the identification of deficiencies related to allegations of 
phone-hacking and bribery in the U.K. In our analysis, we placed particular 
emphasis on the introduction by the company of new compliance standards and 
practices.
     -- We are affirming our 'BBB+' corporate credit rating, and removing all 
ratings from CreditWatch, where they were placed with negative implications on 
July 18, 2011, although we recognize the potential for future reputational, 
business and financial risks related to the criminal prosecution of former 
executives of NI Group Limited.
     -- Separately, we expect that credit metrics and financial policy for the 
new entertainment entity will remain relatively unchanged following the 
company's planned split-off of its publishing businesses.
     -- The stable rating outlook reflects our expectation that News Corp. 
will be able to maintain its fully adjusted leverage below our 3.25x rating 
threshold while preserving strong or adequate liquidity following the proposed 
split-off, and despite potential acquisitions, ongoing investments, and future 
civil and criminal monetary penalties.
Rating Action
On Nov. 30, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+' 
corporate credit rating on New York-based diversified media company News Corp. 
following our review of management and governance standards and practices and 
we removed the ratings from CreditWatch with negative implications, where they 
had been placed on July 18, 2011. The outlook is stable.
Rationale
The ratings affirmation follows the completion of our review of the company's 
management and governance profile, evidenced by strengthened ethics and 
compliance practices and training, as well as our assessment of the 
longer-term impact of the proposed spinoff.  News Corp. is instituting a new 
compliance structure, which we believe could reduce the potential for future 
unlawful or improper conduct at the business-unit level. The success of these 
new policies, training and procedures will ultimately be evidenced by the 
company's track record over the next several years. We score management and 
governance as "Fair" under our criteria, reflecting our view that there are 
still significant risks relating to its board effectiveness, the influence of 
controlling ownership, and a history of legal infractions and ethical lapses ( 
See "General Criteria: Methodology: Management And Governance Credit Factors 
For Corporate Entities And Insurers," published Nov. 13, 2012, on Ratings 
Direct). 

To date, we believe the reputational and business risks cited in our July 18, 
2011 CreditWatch listing been relatively limited, but do include sizeable 
legal costs and the forfeiture of certain business opportunities (such as 
closure of a profitable publishing business and abandoning of the company's 
attempt to take full ownership of the U.K.'s largest pay TV operation). We are 
aware of ongoing investigations in the U.K. and U.S., and the publication of 
Part I of the Leveson Inquiry and will continue to monitor any potential 
future repercussions for management credibility and the company's 
creditworthiness. 

We view News Corp.'s business risk profile as "strong," based on our criteria. 
Our assessment weighs the company's market positions in broadcast TV, cable-TV 
programming, newspaper publishing, newspaper inserts, filmed entertainment, 
and its significant investments in satellite direct-to-home (DTH) businesses 
in the U.K., Italy, and Germany. We expect to maintain our "strong" business 
profile assessment following the split-off of its newspapers, book publishing, 
free-standing inserts, in-store marketing businesses, education businesses, 
and Australia-based media assets. Although the spinoff modestly decreases 
business diversity, we view the publishing businesses as subject to 
significant long-term structural risks, in our opinion. We view News Corp.'s 
financial risk as "intermediate," based on its moderate leverage, healthy 
conversion of EBITDA to discretionary cash flow, and high cash balances.

In addition to its filmed entertainment, cable and broadcast networks, 
satellite DTH, and newspaper publishing businesses, News Corp. has significant 
investments in nonconsolidated associate companies from which it receives 
dividend distributions--the largest contributor being BSkyB (39.1% owned). The 
feature film segment has been an industry leader in profitability and cost 
management, but, like other players, has experienced secular pressure on DVD 
sales, and seeks to boost film revenue through new distribution channels while 
aiming to preserve DVD revenue. Broadcasting operations face somewhat less 
favorable long-term trends because of audience fragmentation, and like peers, 
the Fox network has experienced primetime ratings declines in the 2012-2013 
broadcast season. As of Nov. 25, 2012, audience ratings among adults 18-49 are 
down 29% for the Fox network. Lower audience ratings typically require the 
network to issue 'make-goods' or alternative commercial inventory to 
advertisers, which negatively impact advertising revenue. We see some risk to 
broadcast network performance in fiscal 2013, especially if prime-time ratings 
leader "American Idol" continues to underperform. Cable networks continue to 
post strong affiliate rate increases, which we believe will be a source of 
continued growth in fiscal 2013 because of carriage renewals for networks such 
as Fox News and FX. We also expect continued growth in distribution and 
revenue of the Fox International Channels.

Under our base-case scenario in fiscal 2013, assuming restructuring and legal 
expenses moderate slightly from fiscal 2012, we believe revenue could grow at 
a mid-single-digit percentage rate, while EBITDA could increase at a 
mid-to-high-single digit percentage rate. We expect cable and television to be 
the main growth drivers, the latter benefiting from political advertising in 
fiscal 2013. We expect declines at Sky Italia to continue at the first fiscal 
quarter pace; EBITDA fell roughly 50% due to the weak economy in Italy and 
subscriber declines. We expect Sky Italia could remain a drag for several 
years, due to economic conditions in Italy and expensive sports programming at 
Sky, namely, licensing fees for the Olympics and World Cup over the next 
several years. We expect the EBITDA margin to be relatively flat in fiscal 
2013 at around 20% to 21%, but could increase to the mid-20% area in fiscal 
2014 assuming completion of the spin-off of lower margin publishing 
properties, and benefiting from the absence of losses at the spun-off 
education business.  Risks to our base-case forecast include further weakening 
of advertising revenue and audience losses at the Fox network.

Balance-sheet gross debt to EBITDA was about 2.3x as of Sept. 30, 2012, 
compared to 2.2x in the year-ago period, as EBITDA growth was offset by new 
debt issuances of $1 billion. Pension- and lease-adjusted gross debt plus all 
debt-like elements to lease- and pension-adjusted EBITDA was about 2.8x. 
Conservatively assuming all existing debt remains at the entertainment entity, 
and the publishing entity is spun off with $2 billion to $3 billion of cash, 
we estimate pro forma adjusted debt to EBITDA will be relatively unchanged by 
fiscal 2014, at around 2.6x--still under our current 3.25x leverage threshold 
for the existing company. Currently, we do not expect any shifts in financial 
policy at the remaining entertainment entity that would increase leverage from 
current levels.

Conversion of EBITDA to discretionary cash flow was healthy at about 38% for 
the 12 months ended Sept. 30, 2012, relatively flat with the prior year 
period. We expect conversion to remain in the high-30% to low-40% area in 
fiscal 2013. The company repurchased roughly $4.2 billion shares for the 12 
months ended Sept. 30, 2012, under its $10 billion share repurchase plan. We 
believe share repurchases could decline in fiscal 2013 compared to the $4.7 
million of share repurchases in fiscal 2012, due to acquisitions and potential 
cash needs and distributions related to the proposed spin-off. Going forward, 
given News Corp.'s cash balances and cash flow generation, we believe share 
repurchases will remain manageable, but in conjunction with unexpected 
acquisitions, could reduce financial flexibility.

Liquidity
Based on our current analysis, we believe News Corp. has "strong" liquidity 
over the next 24 months. In addition, we believe the company has significant 
capacity to cover most scenarios of litigation-related financial penalties, 
based on an array of precedents, and still maintain strong liquidity. 
Expectations and assumptions that support our liquidity assessment include the 
following:
     -- We expect sources of liquidity to exceed uses by 1.5x or more over the 
next 12 months and to remain above 1.0x over the next 24 months.
     -- We also expect net sources to remain positive, even if EBITDA declines 
by 30%.
     -- In our opinion, News Corp. has a wide margin of compliance with its 
4.5x debt leverage covenant, which could withstand an EBITDA decline of 50% 
without breaching the covenant.
     -- Because of its high cash balances and good discretionary cash flow 
generation, we believe the company could absorb high-impact, low-probability 
adverse business developments without refinancing.
     -- We view News Corp.'s relationships with bank lenders as solid and well 
established.
     -- In our opinion, the company has a generally high standing in the 
credit markets.
     -- News Corp. typically demonstrates prudent financial risk management, 
in our view, but has shown an appetite for sizable, unexpected acquisitions 
and investments.

News Corp.'s sources of liquidity include cash balances (which stood at 
roughly $12 billion as of Sept. 30, 2012), and nearly full access to its $2 
billion revolving credit maturing in May 2017 (which it has only used for 
issuances of LOCs). In addition, funds from operations (FFO) of about $4.7 
billion for the 12 months ended Sept. 30, 2012, could increase modestly over 
the next 12 months assuming no material rise in restructuring and legal 
expenses. We expect that uses of liquidity over the next 12 months will 
include capital expenditures (which we estimate between $1.0 billion and $1.2 
billion), investments in equity affiliates, shareholder dividends of roughly 
$630 million, and nominal debt maturities of $273 million in fiscal 2013. We 
expect investment spending to increase in fiscal 2013 due to the acquisition 
of ESPN Star Sports, Consolidated Media Holdings ($2 billion), and the 
purchase of a 49% stake in the YES Network. Other potential, but 
noncontractual, uses of liquidity include News Corp.'s new $5 billion share 
repurchase program. As a result, we expect ending cash balances of around $5 
billion to $6 billion for fiscal 2013.
Outlook 
The rating outlook is stable and addresses our expectation that News Corp. 
will be able to maintain its fully adjusted leverage below our 3.25x threshold 
for the company at a "BBB+", while preserving strong to adequate liquidity 
following the proposed spin-off, and despite potential acquisitions, ongoing 
investments, and possible future civil and criminal penalties. We will 
continue to monitor the longer-term impact of ongoing investigations in the 
U.K. and U.S., and could recommence a CreditWatch or lower the rating due to 
unexpected business ramifications outside the U.K. publishing assets. In 
addition, a rating downgrade could result if leverage were to increase and 
remain above 3.25x for a prolonged period because of acquisitions or 
shareholder returns, in conjunction with slower-than-expected growth or 
underperformance at key operating segments, because of either competitive or 
industry pressures.. Slower growth could limit the company's ability to absorb 
acquisition-related spikes in leverage.

An upgrade, which we see as unlikely, would likely an established track record 
regarding new management and governance practices, no meaningful financial or 
reputational impact from ongoing investigations in the U.K. and U.S., a 
further conservative shift in financial policy, and greater clarity with 
respect to leadership succession. Given current ownership and control, we view 
an upgrade as unlikely and further believe that a 'BBB+' rating may represent 
management's most efficient level of credit quality that also balances growth 
objectives and equity returns.


Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed; CreditWatch Action
                                        To                 From
News Corp.
News America Inc.
 Corporate Credit Rating                BBB+/Stable/--     BBB+/Watch Neg/--

News Corp.
 Senior Unsecured                       BBB+               BBB+/Watch Neg

News America Inc.
 Senior Unsecured                       BBB+               BBB+/Watch Neg

News Corp. Exchange Trust
 Preferred Stock                        BBB-               BBB-/Watch Neg
FILED UNDER:
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