The Walt Disney Company's (Disney) $4 billion acquisition of film
production company Lucasfilm Limited (Lucasfilm) has no impact on the
company's 'A' ratings or Stable Outlook. A full list of ratings can be
found at the end of this release.
On Oct. 30, Disney announced that it will acquire Lucasfilm for $4 billion, consisting of $2 billion of cash and $2 billion of equity. Fitch anticipates that Disney will repurchase the $2 billion of issued equity over the subsequent 24 months. Free cash flow generated over that period will more than cover these cash outlays. Fitch expects the company to fund the acquisition with a combination of cash on hand, commercial paper, and potentially term issuance. The transaction is expected to close within the next six months.
The acquisition is another demonstration (other examples include Marvel and Pixar) of Disney's strategy of bolstering its organic franchises with acquisitions of highly successful film slates. These acquisitions enable the company to exploit the acquired IP across its various channels (parks, consumer products) and to collaborate on future franchise development. Lucasfilm's franchises include Star Wars. Disney has previously worked with Lucasfilm to develop park attractions, although the acquisition will clearly improve the economics. Disney's ratings have long incorporated its ability, surpassing that of its peers, to consistently leverage and monetize its brands and characters across all aspects of its business, which benefits the company's operating profile and free cash flow generation.
The ratings and Stable Outlook reflect Disney's ample financial flexibility, underpinned by strong free cash flow generation, total leverage around 1.4x and net adjusted leverage (excluding international parks and minority stake in ESPN, and including investments in A&E/Lifetime) below 1.0x. Fitch expects annual free cash flow generation to exceed $3.5 billion beginning in fiscal 2013, after the completion of large capital projects in fiscal 2012. Although the company faces a considerable maturity schedule over the next several years, it will be easily manageable with free cash flow and access to the capital markets. Ratings incorporate Fitch's expectations that the company will deploy all of its free cash flow for share repurchases and M&A, as well as moderate activity in excess of free cash flow, given strong liquidity and current credit profile.
Ratings incorporate the cyclicality of the company's businesses, particularly Parks & Resorts (30% of revenue), Consumer Products (8%), and the advertising portion of Broadcast and Cable Networks (19%). These businesses have exhibited a degree of resiliency in the recent sluggish macroeconomic backdrop but remain at risk in the event of a more severe economic downturn. Should macroeconomic volatility return, Fitch expects these cyclical businesses to be under renewed pressure but that the company's credit and financial profile will likely remain within current ratings. Ratings incorporate Fitch's expectation that the Studio Entertainment business, similar to that of its peers, will remain volatile and low margin, given the hit-driven nature. The decline of DVD sales, which is the window in which many films become profitable, is becoming less of a concern amid the growth of higher-margin digital distribution, and should be accommodated within current ratings.
Disney's liquidity at June 30, 2012 was strong and consisted of $4.4 billion of cash ($532 million of which was held at the International Theme Parks), as well as $4.5 billion available under two revolving credit facilities (RCF) of $2.25 billion each; the first matures in February 2015 and the second in June 2017. These facilities backstop Disney's commercial paper (CP) program. Liquidity is further supported by the company's aforementioned strong annual free cash flow generation.
Total debt at June 30, 2012 was approximately $15 billion and consisted primarily of:
--$1 billion of CP;
--$10.1 billion of notes and debentures, with maturities ranging from December 2012 - 2093;
--$2 billion of debt related to Disneyland Paris (subsequently refinanced) and Hong Kong Disneyland, which is non-recourse back to Disney but which Fitch consolidates under the assumption that the company would back the loan payments rather than risk hurting its brand image by letting these entities default;
--Approximately $1.1 billion of European notes and other foreign currency denominated debt;
--Approximately $300 million of debt assumed in the February 2012 acquisition of UTV.
Fitch currently rates Disney as follows:
The Walt Disney Company
--Issuer Default Rating (IDR) 'A';
--Senior unsecured debt 'A';
--Short-term IDR 'F1';
--Commercial paper 'F1'.
--Senior unsecured debt 'A'.
Disney Enterprises, Inc.
--Senior unsecured debt 'A'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Corporate Finance' (Aug. 9, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Evaluating Corporate Governance' (Dec. 13, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates
Parent and Subsidiary Rating Linkage
Evaluating Corporate Governance
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