Moody’s Investors Service believes that Nielsen’s acquisition of Arbitron makes all kinds of strategic sense and was a great move. However, the debt incurred to do so will halt the progress the company was making to deleverage, resulting in a downward adjustment to its rating outlook.
The change doesn’t put it into a bad category – the new rating is stable, but it constitutes a downgrade from the positive territory from whence it came.
Moody’s said that 2012 leverage of about 4.7X was on track to approach the 4.0X level, but the combination of debt incurred to buy Arbitron as well as the payment of dividends could shoot it above 5.0X instead.
It explained, “Moody’s believes that the acquisition of Arbitron makes strategic sense for Nielsen as the strong market position of its ‘Watch’ division will be cemented by: (i) the addition of Arbitron’s complementary capabilities in radio and out-of-home media other than radio; (ii) the ability to measure more media consumption; (iii) some synergies (around $20 million according to Nielsen); and (iv) over time, the potential to internationalize some of Arbitron’s services. However, the transaction comes at a cost, with the purchase price representing a multiple of just over 10x Arbitron’s LTM EBITDA to September 2012. The transaction is still subject to customary closing conditions such as the approval of Arbitron’s shareholders as well as to completion of regulatory reviews.”
Bottom line, Moody’s expects good things from the company based on its global footprint and its insulation from competition due to the difficulty of entering its business space. Moody’s wrote, “Nielsen’s Ba3 CFR continues to reflect our view that the company enjoys strong international business positions with high barriers to entry. In addition, it is based on our expectation that the company can build on its track record to deliver continued solid revenue growth and can thus leverage its cost base, optimized over the last few years, to produce steady profit growth. In addition, we expect that the company will utilize free cash flow generation to reduce debt further. However, the ratings also reflect the company’s still considerable leverage, the currently more challenging operating environment in Nielsen’s ‘Buy’ division as well as exposure, particularly in the ‘Watch’ division to a fast moving technological environment and a more competitive landscape in faster growing markets (e.g. online).”
RBR-TVBR observation: It never seemed to us that Nielsen’s Arbitron buy was a particularly risky dice roll. The combination of the two companies is indeed a rarity – they are so obviously similar that the business sense of the marriage cannot be doubted for a moment. At the same time, the businesses they measure are so clearly apart from one another that we believe there will be no problem sailing through the obligatory regulatory review that will take place in the US. And once the two companies are combined, the opportunities to derive new products that measure across media platforms must be tantalizing to the occupants of Nielsen’s executive suites.