Fitch Downgrades Naspers to 'BB+'; Outlook Stable

Wed Aug 13, 2014 2:01am EDT

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(The following statement was released by the rating agency) JOHANNESBURG/LONDON, August 13 (Fitch) Fitch Ratings has downgraded South Africa-based media group Naspers Limited's (Naspers) Long- and Short-term Issuer Default Ratings (IDR) to 'BB+' from 'BBB-' and to 'B' from 'F3', respectively. Fitch has also downgraded the senior unsecured rating to 'BB+' from 'BBB-', National Long-term rating to 'A-(zaf)' from 'A+(zaf)' and affirmed the National Short-term rating at 'F1(zaf)'. The Outlook is Stable. The downgrade reflects the deterioration in the group's profitability mainly due to its high development spend as Naspers continues to invest in growth opportunities. Existing operations are performing well, but higher-than-expected investments in global ecommerce and sub-Saharan pay-TV opportunities have led us to reduce our expectations of EBITDA and free cashflow (FCF) over the next three years. Visibility of future cashflow generation is limited and the resulting increase in leverage means that Naspers' credit metrics are no longer compatible with an investment-grade rating. It should be noted that Nasper's equity stakes in Tencent and Mail.ru are a considerable liquidity source, which allows the 'BB+' rating to tolerate two years of weaker credit metrics due to high development spend. KEY RATING DRIVERS E-Commerce Scales Up Naspers is in a multi-year development phase to expand the scale of its e-commerce platforms in approximately 40 countries. E-commerce is Naspers second-largest division but is the fastest growing and management expects it to be the main EBITDA growth engine in the years ahead. As a result of continued heavy development spend (ZAR5.6bn in the financial year to March 2014, higher than Fitch had expected), this division is cash flow-negative and is unlikely to contribute to positive cash flow for at least the next 24 months. Some of Naspers' businesses are currently the largest integrated e-commerce platforms in their respective countries but uncertainty remains over when this division as a whole will generate sustainable positive cash flow. The development spend (mostly marketing and staff costs) is to build an unassailable market-leading position for Naspers' ecommerce operations in the years ahead. We consider this development spend to be discretionary to the extent that management can stop these at short notice if general conditions deteriorate considerably or if strategic goals are not achieved. Associates Underpin Investment Risks Naspers' 34% equity stake in Tencent (valued at USD54bn at current market price) and its 29% stake in Mail.ru (valued at USD1.6bn) generate a growing dividend stream for the company, with ZAR793m received from Tencent in FY14. In line with our rating methodology, the value of these two unencumbered minority stakes is not explicitly reflected in Fitch's credit metrics - only the dividends received - but we recognise the considerable source of liquidity these investments represent. Partial stakes in these listed companies can be sold down fairly swiftly, allowing Naspers to repay all of its gross debt. Because of this potential liquidity source, the 'BB+' ratings can tolerate two years of weaker credit metrics due to high development spend. A material change in the value of these two equity stakes, or the ease at which these stakes can be monetised to repay debt, would cause us to reassess this liquidity benefit. Pay TV Segment Naspers' South African pay-TV business (80%-owned) continues to grow profitably, generating cash that is being used to fund investment in other areas. FCF should improve substantially in FY16 as Naspers would have completed investments in its new Pay-TV building in Johannesburg and new broadcasting facilities in west and east Africa, and as capex for new digital terrestrial television (DTT) networks in sub-Saharan Africa tapers off in the next 12-24 months. Increased cash generation should follow growing demand for digital TV services as analogue signals in various African countries are turned off over the next few years. Increase in Leverage The development spend places strain on Naspers' credit metrics as funds from operations (FFO) were reduced by ZAR3bn in FY14 (excluding special dividend from Mail.ru), which resulted in an increased FFO-adjusted net leverage to 5.6x in FY14 from 1.7x in FY13 (excluding satellite finance leases). RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: - FFO-adjusted net leverage (excluding satellite finance leases) remaining below 2.0x on a sustained basis - Strong and sustainable free cash flow generation within the 12-18 months, including improved cash flow contribution from the e-commerce division - Solid operating performance from Naspers' core operations, as well as from the new pay-TV and ecommerce businesses that Naspers is currently developing - A tangible commitment to balance the long-term interests of bondholders with those of shareholders Negative: Future developments that could lead to negative rating actions include: - FFO-adjusted net leverage above 3.0x (excluding satellite finance leases) and with no clear deleveraging path - Further deterioration in FCF generation or expectations that FCF generation would not significantly improve over the next three years - Unexpected regulatory pressures relating to competition in the domestic pay TV market or changes in government regulations affecting the ability to service foreign debt - Significant reduction in ecommerce revenue growth from fully consolidated operations, given the amount of development spent to scale up these businesses. Revenue weakness would be viewed in conjunction with margin developments and effects on overall group EBITDA Contact: Primary Analyst Yeshvir Singh Associate Director +27 11 290 9401 Fitch Ratings Southern Africa (Pty) Ltd 23 Impala Road Chislehurston Sandton Johannesburg, 2196 Secondary Analyst Damien Chew, CFA Senior Director +44 20 3530 1424 Committee Chairperson Michael Dunning Managing Director +44 20 3530 1178 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. (a) No part of the rating was influenced by any other business activities of the credit rating agency; (b) The rating was based solely on the merits of the rated entity, security or financial instrument being rated; (c) Such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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