Oct 15 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed UK-based Daily Mail & General Trust’s (DMGT) Long-term Issuer Default Rating (IDR) and senior unsecured rating at ‘BBB-‘. The Outlook on the Long-term IDR is Stable.
The ratings take into account a portfolio of businesses that has become increasingly B2B focused (approaching 80 of % EBITA), which nonetheless lacks the scale of some professional publishers such as Reed Elsevier (A-/Stable) or Thomson Reuters (A-/Stable). The ratings also consider the successful consumer/national news business, albeit one that continues to face industry structural change, and management’s consistent and measured financial policies.
Effective Portfolio Transition
The portfolio shift from UK newspapers (80% of EBITA in 2002) to a diversified portfolio of B2B and consumer businesses has been effective, with the group now exhibiting a balanced mix of revenue type and geography. Print advertising accounts for just 20% of group revenues (FY12), while subscription is the single largest contribution (28%), followed by circulation revenues (21%). The latter is derived entirely from newspapers, a segment that faces ongoing structural decline. However, management is shifting this business online, including the Mail Online news portal, and the introduction of a pay wall for national titles (Mail Plus).
B2B Portfolio Growth
Pro-forma for the Northcliffe disposal the B2B businesses account for 79% of group EBITA (2012), reflecting a carefully constructed portfolio of business-orientated publishing, data analytics, risk management and events activities. Execution risk remains in some of these businesses, as new platforms are rolled out with the prospect of long-term growth accompanied by near-term investment costs. However, the B2B businesses offer embedded solutions to customers with critical information and analytic needs and a more stable and predictable cash flow.
While the group is synonymous with its Mail newspaper titles, management continues to shift the mix of consumer revenues (DMG media) towards digital. As well as what remains one of the UK’s most successful print newspaper businesses, management recognises the online opportunity in the business to consumer (B2C) segment with Mail Online and businesses like Evenbase (recruitment) and Zoopla (51%-owned online property search) underpinning a target to reach 29% digital revenues within the division by 2015 (2011: 14%). In Fitch’s view, long term-decline of print news makes this transition critical to the sustainability of the consumer businesses.
Local World Stake
The December 2012 disposal of its Northcliffe regional newspapers business to a joint venture involving Trinity Mirror (20% stake) and the Iliffe family (21.3%) for cash proceeds of approximately GBP53m and 38.7% in the newly-created Local World, has removed direct exposure to regional newspapers. DMGT remains the venture’s single largest shareholder, invested in a business that continues to face long-term structural decline and a need for wider industry consolidation. Fitch does not believe management would be motivated to support Local World in the event of funding needs, with its formation allowing management of the regional business more autonomy (to manage costs) than if it had stayed within DMGT control.
Measured Financial Policies
Group net debt and leverage have been reduced from a high of GBP1.0bn and 3.1x in 2009; values Fitch expects to remain at around GBP650m- GBP700m and below 2.0x, respectively. With the latter achieved through a combination of organic cash flow generation, improved earnings and net disposal proceeds, management is publicly committed to a leverage metric (net debt/EBITDA) of 2.0x or below a level consistent with the ratings. Free cash flow will be used for bolt-on acquisitions, which are likely to be in B2B businesses. M&A activity from fiscal 2014 is likely to move to a net out flow, although Fitch considers transformational deals unlikely.
Negligible Refinancing Risk
DMGT has traditionally been funded in long-dated sterling bonds, providing negligible refinancing risk. However, coupons are somewhat high with the group largely missing out on the benefits of the historically low policy rates of recent times.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO net leverage persistently trending above 3.5x, a metric that Fitch expects to correlate approximately to 2.7x net debt to EBITDA. While allowing considerable headroom verses the company’s stated (2.0x) leverage target - payments to the pension fund have in the past inflated the FFO net adjusted metric (3.2x at YE12 for instance). Fitch would be concerned if net debt to EBITDA deteriorated materially above the company’s 2.0x target purely from operational weakness.
- A declining print news industry makes the consumer transition to online important. Weakening consumer earnings trends would be a concern and could prompt negative action. Execution risk in major B2B project roll-outs will also be closely followed.
Positive: An upgrade would only be possible once greater clarity and success of the digital transition in consumer has been established and businesses like RMS in B2B have proven the revenue (and margin) potential of its new platform roll-out.