TEXT-S&P summary: Bertelsmann SE & Co. KGaA
(The following statement was released by the rating agency)
Dec 13 -
Summary analysis -- Bertelsmann SE & Co. KG aA -------------------- 13-Dec-2012
CREDIT RATING: BBB+/Stable/A-2 Country: Germany
Primary SIC: PRINTING AND
Credit Rating History:
Local currency Foreign currency
23-May-2011 BBB+/A-2 BBB+/A-2
10-Jun-2009 BBB/A-2 BBB/A-2
The ratings on Germany-based media group Bertelsmann SE & Co. KGaA reflect Standard & Poor's Ratings Services' view of the cash-generative nature of Bertelsmann's well-established and diversified consumer media businesses and its supportive financial policy. Bertelsmann owns the world's largest consumer book publisher, Random House, and 92.3% of Europe's largest broadcaster, RTL Group S.A. (RTL; BBB+/Stable/A-2). Bertelsmann is a European leader in magazines and periodicals through Gruner + Jahr. Bertelsmann also has a strong presence in contract printing, business services, and storage media through its Arvato division.
These factors are counterbalanced by Bertelsmann's exposure to cyclical advertising markets and the ongoing structural shift in many subsegments of its media business. In periods of economic downturn in particular, the group faces significant challenges associated with arresting revenue decline and maintaining adequate margins across its various businesses.
In October 2012, Bertelsmann and Pearson announced the merger of their consumer book publishing activities. The tie-up will create the world's largest consumer publishing company by far, with an estimated 25% global market share and, beyond meaningful synergies, should allow the new entity--Penguin Random House-to better face structural challenges caused by the rise of e-books.
S&P base-case operating scenario
Assuming constant currencies and no significant acquisitions or disposals, we anticipate that Bertelsmann will report low-single-digit revenue growth in 2012. This is mainly driven by our expectation of flat revenues for RTL, mid-single-digit growth for Arvato, and double-digit growth for Random House, the latter benefiting from the extraordinary publishing success of the "Fifty Shades" trilogy. We anticipate a mid-single-digit decline in Gruner + Jahr's revenues, which we think will increasingly suffer from lower consumer magazine advertising spending and declining subscriptions as the result of changing consumer habits.
We have revised downward our forecast for the group's EBITDA margins. While we previously anticipated broadly stable 2012 and 2013 adjusted EBITDA margins compared with 2011, we now anticipate a moderate decline in 2012 to about 13.5% and further contraction to about 13% in 2013, which compares with 14.4% in 2011. This is due to our expectation of an increasingly challenging environment for advertising spending in Europe, coupled with rising programming costs at RTL, continued margin erosion at Gruner + Jahr, and weaker earnings at Random House as the "Fifty Shades" effect wears off in 2013.
S&P base-case cash flow and capital-structure scenario
Like many media businesses, Bertelsmann reports strong cash conversion. For 2011, the group's cash conversion rate (the ratio of reported operating free cash flow to operating EBIT) was 100%, compared with 112% a year before. The decline was due to stronger operating investment activities (economic investments totaled EUR1.13 billion in fiscal 2011 versus EUR0.81 billion in 2010), which we expect to remain at similar levels for 2012 and 2013. As a result, we estimate that the group will generate free operating cash flow (FOCF) of about EUR1.0 billion annually for 2012 and 2013. Absent any large, debt-financed acquisitions, this would result in adjusted FOCF to debt of 20% to 22% (which compares with 22.2% for 2011) and adjusted debt to EBITDA of 2.4x to 2.5x. We note that whilst being within our target range for the current ratings, this leaves little to no headroom for any larger debt-financed acquisitions or for a material decline in operating performance.
All other things being equal, the merged entity Penguin Random House, if consolidated from the second half of 2013, would positively affect adjusted debt to EBITDA by 0.1x to 0.2x on an annualized basis. A loss of direct access to RH cash, which we would view negatively, could be partly offset by a clear dividend policy that would pay out close to 100% of net profits.
The group's financial policy as expressed by Bertelsmann's target leverage factor of economic debt to operating EBITDA of less than 2.5x (equivalent to Standard & Poor's adjusted debt to EBITDA of about 2.4x when comparing 2011 ratios)is a support to the ratings.
The short-term rating is 'A-2'. We assess Bertelsmann's liquidity as strong under our criteria, reflecting our view that its liquidity sources will exceed its funding needs by more than 1.5x over the next 24 months, even in the event of moderate unforeseen declines in EBITDA.
As of Sep. 30, 2012, we estimate Bertelsmann's liquidity sources over the next 12 months to be about EUR4.9 billion. These include:
-- About EUR2.2 billion in cash and cash equivalents;
-- Forecast sizable and recurrent FFO in excess of EUR1.5 billion in each of the next two years; and
-- Fully available committed bank lines of EUR1.2 billion maturing in July 2017. The credit facility includes one financial covenant under which we forecast Bertelsmann to maintain significant headroom.
We estimate Bertelsmann's liquidity needs over the same period to be about EUR1.4 billion, including:
-- Average capital expenditures of about EUR500 million per year;
-- Financial liabilities of about EUR155 million coming due over the next 12 months;
-- Average disbursements for acquisitions of EUR300 million per year; and
-- Distribution of less than EUR400 million in dividends per year
The stable outlook reflects our view that Bertelsmann's stable revenues and operating margin trends will likely continue over the next couple of years. It also takes into account our assumption that Bertelsmann's moderate financial policy will translate into adequate cash flow and asset protection ratios for the ratings. At the 'BBB+' rating level, we view adjusted FOCF to debt of greater than 20% and adjusted debt to EBITDA in the range of 2.0x-2.5x as commensurate with the rating, assuming that the group's business mix remains unchanged.
We could lower the rating over the next year or two if Bertelsmann's leverage were to persistently exceed 2.5x adjusted debt to EBITDA, or if the group's adjusted FOCF-to-debt ratio were to fall to less than 20%. Factors that could contribute to such a development include, for example, a reverse in currently favorable operating trends, aggressive debt-financed acquisitions, or a more shareholder-friendly financial policy.
We consider the possibility of an upgrade to be remote, due to the improvements that we have factored into our base-case scenario, and our assessment of the group's business risk profile.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008