RPT-Fitch affirms Bertelsmann at 'BBB+; outlook stable
Aug 14 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Germany-based Bertelsmann SE & Co KGaA's (Bertelsmann) Long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB+'. The Outlook is Stable. The company's Short-term IDR has been affirmed at 'F2'.
The ratings take into account the company's mix of media businesses, which include leading pan-European commercial TV broadcaster, RTL Group SA, and the recently formed Penguin Random House - a market leader in book publishing. These businesses are the bedrock of the group. RTL in particular accounted for 54% of 2012 EBITDA and provides key support for the ratings.
Concerns relate to questions that Gruner & Jahr (magazines) has been slow to transition the business model on-line as well as over the growth and margin profile of recent M&A activity. The sale of a 17% stake in RTL (net proceeds of EUR1.3bn) reduces ownership in the company's strongest portfolio asset to 75% and will increase dividend leakage considerably. While important in terms of preserving credit metrics at a time when management are seeking to invest in higher growth areas, Fitch notes that any further sell-down could lead the agency to proportionately consolidate this business. Details on acquisitions such as the 50% buy-out of music publisher, Bertelsmann Music Group (BMG) BMG, are limited. A reported valuation in the range of EUR800m for full ownership of a business that will not be separately reported, suggests a high valuation multiple.
KEY RATING DRIVERS
RTL Underpins Profile
RTL is Europe's largest free-to-air TV broadcaster and by far the most significant part of the group (54.5% of 2012 divisional EBITDA). RTL benefits from good geographic diversification with market-leading positions in Germany, France, the Netherlands and Spain. RTL's successful content production business Freemantle provides a greater degree of revenue visibility than its peers in an industry characterised by highly cyclical advertising revenues.
Mix of Businesses
Bertelsmann has a unique portfolio of businesses, not easily compared across the media peer group, with TV broadcasters/producers the most obvious comparable. The group includes business process outsourcing provider Arvato, leading book publisher Penguin Random House and magazine publisher Gruner & Jahr. Offering no obvious synergies or overlap, its businesses are generally well managed, although a number encountered margin compression in 2012.
Transition to Digital Platforms
Management recognises the need to focus on digital media and change the complexion of revenues. The acquisition of Kohlberg Kravis Roberts & Co's 50% joint venture stake in BMG in March 2013, and the decision to combine its trade book publishing operations (Random House) with Pearson (Penguin) underlines this focus. While a 53% stake in the newly formed Penguin Random House raises questions of proportionate consolidation, Fitch views Bertelsmann as the driving partner in the venture and does not currently adjust the JV's results.
These acquisitions fit with management's desire to reduce exposure to Europe, move away from traditional advertising and develop its digital businesses. The BMG acquisition scales up its music publishing interests. Music will not though be reported separately, suggesting a high acquisition multiple while not changing the group's earnings profile materially. The partnership with Penguin creates economies of scale, a substantially larger business and better pricing leverage with online distribution platforms like Amazon and iTunes.
M&A and Leverage
The recent EUR3.3bn sale of Springer Science (previously mooted as a target for Bertelsmann) to BC Partners, reduces the risk of a balance sheet-transforming acquisition. However, Bertelsmann's stake sale in RTL - for net cash of EUR1.3bn - along with management's stated expansion ambitions, increase the likelihood of M&A. Concerns remain that the reinvestment of the RTL proceeds (in BMG and Arvato's Gothia acquisition) will not materially change the earnings profile but there is limited disclosure around these deals.
Positive: Future developments that may lead to positive rating action include:
- Given the weighting of earnings towards commercial TV (a sector that Fitch deems as typically residing no higher than the 'BBB' category), and the lower margins of the remaining businesses, an upgrade is currently deemed unlikely. Negative: Future developments that may lead to negative rating action include:
- Profit participation certificate adjusted FFO net adjusted leverage that was sustained above 2.0x (YE12: 1.8X), whether through weak operating performance or M&A would create downward ratings pressure. M&A induced leverage would be considered in the context of how accretive a deal was likely to be and the timeframe set by management to deleverage to more conservative levels.
- Pre-dividend free cash flow to sales consistently below 4% (YE12: 6.3%) would also lead to negative rating pressure.
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