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TEXT - Fitch says Discovery Communications rtgs unaffected by acquisition
December 14, 2012 / 7:50 PM / 5 years ago

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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