-- We have concluded our review of News Corp.'s management and governance
following the identification of deficiencies related to allegations of
phone-hacking and bribery in the U.K. In our analysis, we placed particular
emphasis on the introduction by the company of new compliance standards and
-- We are affirming our 'BBB+' corporate credit rating, and removing all
ratings from CreditWatch, where they were placed with negative implications on
July 18, 2011, although we recognize the potential for future reputational,
business and financial risks related to the criminal prosecution of former
executives of NI Group Limited.
-- Separately, we expect that credit metrics and financial policy for the
new entertainment entity will remain relatively unchanged following the
company's planned split-off of its publishing businesses.
-- The stable rating outlook reflects our expectation that News Corp.
will be able to maintain its fully adjusted leverage below our 3.25x rating
threshold while preserving strong or adequate liquidity following the proposed
split-off, and despite potential acquisitions, ongoing investments, and future
civil and criminal monetary penalties.
On Nov. 30, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+'
corporate credit rating on New York-based diversified media company News Corp.
following our review of management and governance standards and practices and
we removed the ratings from CreditWatch with negative implications, where they
had been placed on July 18, 2011. The outlook is stable.
The ratings affirmation follows the completion of our review of the company's
management and governance profile, evidenced by strengthened ethics and
compliance practices and training, as well as our assessment of the
longer-term impact of the proposed spinoff. News Corp. is instituting a new
compliance structure, which we believe could reduce the potential for future
unlawful or improper conduct at the business-unit level. The success of these
new policies, training and procedures will ultimately be evidenced by the
company's track record over the next several years. We score management and
governance as "Fair" under our criteria, reflecting our view that there are
still significant risks relating to its board effectiveness, the influence of
controlling ownership, and a history of legal infractions and ethical lapses (
See "General Criteria: Methodology: Management And Governance Credit Factors
For Corporate Entities And Insurers," published Nov. 13, 2012, on Ratings
To date, we believe the reputational and business risks cited in our July 18,
2011 CreditWatch listing been relatively limited, but do include sizeable
legal costs and the forfeiture of certain business opportunities (such as
closure of a profitable publishing business and abandoning of the company's
attempt to take full ownership of the U.K.'s largest pay TV operation). We are
aware of ongoing investigations in the U.K. and U.S., and the publication of
Part I of the Leveson Inquiry and will continue to monitor any potential
future repercussions for management credibility and the company's
We view News Corp.'s business risk profile as "strong," based on our criteria.
Our assessment weighs the company's market positions in broadcast TV, cable-TV
programming, newspaper publishing, newspaper inserts, filmed entertainment,
and its significant investments in satellite direct-to-home (DTH) businesses
in the U.K., Italy, and Germany. We expect to maintain our "strong" business
profile assessment following the split-off of its newspapers, book publishing,
free-standing inserts, in-store marketing businesses, education businesses,
and Australia-based media assets. Although the spinoff modestly decreases
business diversity, we view the publishing businesses as subject to
significant long-term structural risks, in our opinion. We view News Corp.'s
financial risk as "intermediate," based on its moderate leverage, healthy
conversion of EBITDA to discretionary cash flow, and high cash balances.
In addition to its filmed entertainment, cable and broadcast networks,
satellite DTH, and newspaper publishing businesses, News Corp. has significant
investments in nonconsolidated associate companies from which it receives
dividend distributions--the largest contributor being BSkyB (39.1% owned). The
feature film segment has been an industry leader in profitability and cost
management, but, like other players, has experienced secular pressure on DVD
sales, and seeks to boost film revenue through new distribution channels while
aiming to preserve DVD revenue. Broadcasting operations face somewhat less
favorable long-term trends because of audience fragmentation, and like peers,
the Fox network has experienced primetime ratings declines in the 2012-2013
broadcast season. As of Nov. 25, 2012, audience ratings among adults 18-49 are
down 29% for the Fox network. Lower audience ratings typically require the
network to issue 'make-goods' or alternative commercial inventory to
advertisers, which negatively impact advertising revenue. We see some risk to
broadcast network performance in fiscal 2013, especially if prime-time ratings
leader "American Idol" continues to underperform. Cable networks continue to
post strong affiliate rate increases, which we believe will be a source of
continued growth in fiscal 2013 because of carriage renewals for networks such
as Fox News and FX. We also expect continued growth in distribution and
revenue of the Fox International Channels.
Under our base-case scenario in fiscal 2013, assuming restructuring and legal
expenses moderate slightly from fiscal 2012, we believe revenue could grow at
a mid-single-digit percentage rate, while EBITDA could increase at a
mid-to-high-single digit percentage rate. We expect cable and television to be
the main growth drivers, the latter benefiting from political advertising in
fiscal 2013. We expect declines at Sky Italia to continue at the first fiscal
quarter pace; EBITDA fell roughly 50% due to the weak economy in Italy and
subscriber declines. We expect Sky Italia could remain a drag for several
years, due to economic conditions in Italy and expensive sports programming at
Sky, namely, licensing fees for the Olympics and World Cup over the next
several years. We expect the EBITDA margin to be relatively flat in fiscal
2013 at around 20% to 21%, but could increase to the mid-20% area in fiscal
2014 assuming completion of the spin-off of lower margin publishing
properties, and benefiting from the absence of losses at the spun-off
education business. Risks to our base-case forecast include further weakening
of advertising revenue and audience losses at the Fox network.
Balance-sheet gross debt to EBITDA was about 2.3x as of Sept. 30, 2012,
compared to 2.2x in the year-ago period, as EBITDA growth was offset by new
debt issuances of $1 billion. Pension- and lease-adjusted gross debt plus all
debt-like elements to lease- and pension-adjusted EBITDA was about 2.8x.
Conservatively assuming all existing debt remains at the entertainment entity,
and the publishing entity is spun off with $2 billion to $3 billion of cash,
we estimate pro forma adjusted debt to EBITDA will be relatively unchanged by
fiscal 2014, at around 2.6x--still under our current 3.25x leverage threshold
for the existing company. Currently, we do not expect any shifts in financial
policy at the remaining entertainment entity that would increase leverage from
Conversion of EBITDA to discretionary cash flow was healthy at about 38% for
the 12 months ended Sept. 30, 2012, relatively flat with the prior year
period. We expect conversion to remain in the high-30% to low-40% area in
fiscal 2013. The company repurchased roughly $4.2 billion shares for the 12
months ended Sept. 30, 2012, under its $10 billion share repurchase plan. We
believe share repurchases could decline in fiscal 2013 compared to the $4.7
million of share repurchases in fiscal 2012, due to acquisitions and potential
cash needs and distributions related to the proposed spin-off. Going forward,
given News Corp.'s cash balances and cash flow generation, we believe share
repurchases will remain manageable, but in conjunction with unexpected
acquisitions, could reduce financial flexibility.
Based on our current analysis, we believe News Corp. has "strong" liquidity
over the next 24 months. In addition, we believe the company has significant
capacity to cover most scenarios of litigation-related financial penalties,
based on an array of precedents, and still maintain strong liquidity.
Expectations and assumptions that support our liquidity assessment include the
-- We expect sources of liquidity to exceed uses by 1.5x or more over the
next 12 months and to remain above 1.0x over the next 24 months.
-- We also expect net sources to remain positive, even if EBITDA declines
-- In our opinion, News Corp. has a wide margin of compliance with its
4.5x debt leverage covenant, which could withstand an EBITDA decline of 50%
without breaching the covenant.
-- Because of its high cash balances and good discretionary cash flow
generation, we believe the company could absorb high-impact, low-probability
adverse business developments without refinancing.
-- We view News Corp.'s relationships with bank lenders as solid and well
-- In our opinion, the company has a generally high standing in the
-- News Corp. typically demonstrates prudent financial risk management,
in our view, but has shown an appetite for sizable, unexpected acquisitions
News Corp.'s sources of liquidity include cash balances (which stood at
roughly $12 billion as of Sept. 30, 2012), and nearly full access to its $2
billion revolving credit maturing in May 2017 (which it has only used for
issuances of LOCs). In addition, funds from operations (FFO) of about $4.7
billion for the 12 months ended Sept. 30, 2012, could increase modestly over
the next 12 months assuming no material rise in restructuring and legal
expenses. We expect that uses of liquidity over the next 12 months will
include capital expenditures (which we estimate between $1.0 billion and $1.2
billion), investments in equity affiliates, shareholder dividends of roughly
$630 million, and nominal debt maturities of $273 million in fiscal 2013. We
expect investment spending to increase in fiscal 2013 due to the acquisition
of ESPN Star Sports, Consolidated Media Holdings ($2 billion), and the
purchase of a 49% stake in the YES Network. Other potential, but
noncontractual, uses of liquidity include News Corp.'s new $5 billion share
repurchase program. As a result, we expect ending cash balances of around $5
billion to $6 billion for fiscal 2013.
The rating outlook is stable and addresses our expectation that News Corp.
will be able to maintain its fully adjusted leverage below our 3.25x threshold
for the company at a "BBB+", while preserving strong to adequate liquidity
following the proposed spin-off, and despite potential acquisitions, ongoing
investments, and possible future civil and criminal penalties. We will
continue to monitor the longer-term impact of ongoing investigations in the
U.K. and U.S., and could recommence a CreditWatch or lower the rating due to
unexpected business ramifications outside the U.K. publishing assets. In
addition, a rating downgrade could result if leverage were to increase and
remain above 3.25x for a prolonged period because of acquisitions or
shareholder returns, in conjunction with slower-than-expected growth or
underperformance at key operating segments, because of either competitive or
industry pressures.. Slower growth could limit the company's ability to absorb
acquisition-related spikes in leverage.
An upgrade, which we see as unlikely, would likely an established track record
regarding new management and governance practices, no meaningful financial or
reputational impact from ongoing investigations in the U.K. and U.S., a
further conservative shift in financial policy, and greater clarity with
respect to leadership succession. Given current ownership and control, we view
an upgrade as unlikely and further believe that a 'BBB+' rating may represent
management's most efficient level of credit quality that also balances growth
objectives and equity returns.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; CreditWatch Action
News America Inc.
Corporate Credit Rating BBB+/Stable/-- BBB+/Watch Neg/--
Senior Unsecured BBB+ BBB+/Watch Neg
News America Inc.
Senior Unsecured BBB+ BBB+/Watch Neg
News Corp. Exchange Trust
Preferred Stock BBB- BBB-/Watch Neg