TEXT - Fitch says Discovery Communications rtgs unaffected by acquisition
Dec 14 - Fitch Ratings' 'BBB' Issuer Default Rating (IDR) of Discovery Communications LLC's (Discovery) is unaffected by the announced acquisition of SBS Nordic, potential strategic partnership with TF1 and its increased share repurchase program. A complete list of Fitch's ratings on Discovery is provided at the end of this release. Discovery announced a definitive agreement to acquire the SBS Nordic operations from ProSiebenSat.1 Group for approximately $1.7 billion (EUR1.325 billion). The company also announced its next stage of negotiations with TF1 Group, which includes: 1) Discovery taking a 20% minority interest in the Eurosport group for approximately $221.6 million (EUR170 million), a $1.1 billion valuation. Discovery would have the option to increase its stake to 51% in two years. If Discovery exercised its option, TF1 would have the option to put the remaining 49% to Discovery. 2) Discovery becoming a 20% shareholder in the TV Breizh, Histoire, Ushuaia TV and Stylia channels for approximately $18.2 million (EUR14 million), a $91 million valuation. Discovery would have the option to increase its stake to 49% in two years. 3) A production alliance between TF1 and Discovery, to produce content for TF1's network in France and leverage the content across Discovery's network. The acquisition and investments are consistent with Fitch's expectation that international expansion would be a focus for Discovery. Discovery possesses significant financial flexibility to absorb these investments. The company has solid free cash flow (FCF), strong credit protection metrics for the ratings category, and a minimal near term maturity schedule. In addition, the company announced a $1 billion increase to its share repurchase program. Including the new authorization, Discovery has the authorized availability to repurchase $1.5 billion in shares. Discovery expects its 2013 share repurchase activity to be similar to 2012 levels (September 2012 year to date share repurchases totaled $1.1 billion). Discovery expects the buying activity to begin primarily in the second quarter of 2013 due to the funding of the intended acquisition and investments noted above. The share repurchase program is consistent with Fitch's expectation for FCF to be dedicated towards share repurchases and acquisitions. Discovery has sufficient liquidity to fund its acquisition of SBS Nordic and invest in TF1 assets. As of Sept. 30, 2012, liquidity consisted of $1.6 billion in cash and an undrawn $1 billion credit facility due October 2017. Fitch calculates September 2012 last 12 month FCF of $1 billion. Fitch expects annual FCF of over $1 billion, driven by the high margins, content leveragability across markets and geographic regions, and low capital intensity associated with the cable programming business. As of September 2012, Discovery's debt totals $5.2 billion and near term maturities include $850 million due June 2015, with Discovery's next maturity of $500 million due August 2019. Fitch estimates total leverage of 2.6 times (x) at Sept. 30, 2012. Discovery therefore retains ample flexibility within the ratings for share repurchases and moderate acquisition activity. Debt incurrence to fund share repurchase activity is incorporated into ratings up to Fitch's 3.0x leverage threshold for Discovery's 'BBB' rating. Further, there is tolerance in the ratings to exceed Fitch's leverage target for acquisitions, with the expectation that the company would restore leverage to under 3.0x within a 12-month timeframe. Discovery's ratings are supported by the company's strong core brands, global carriage, leverageable content, robust FCF and solid credit metrics. Ratings concerns continue to center on the significant contribution of cyclical advertising revenue, a competitive landscape of similar programming on other cable channels, the general volatility associated with hit-driven content and the company's dependence on the Discovery and TLC brands. WHAT COULD TRIGGER A RATING ACTION An upgrade is unlikely over the medium term, given the company's stated leverage targets and the limited depth of brands. Future upgrades would only be considered from the combination of the following: 1) an explicit commitment from management and a compelling rationale for Discovery to operate at a more conservative leverage metric and 2) material viewership on new channel launches that will drive increased advertising and affiliate fees and enhance revenue diversity. Negative ratings pressure could result from a more aggressive financial policy with more tolerance for leverage. Rating pressure could also result from meaningful customer defections to free viewing platforms or significant margin and FCF pressure from higher programming costs. Fitch currently rates Discovery as follows: --IDR 'BBB'; --Senior unsecured bank facility 'BBB'; --Senior unsecured notes 'BBB'.
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