One of the major credit rating agencies has looked at the potential financial impact of this week’s UK parliamentary report blasting Rupert Murdoch as “unfit” to lead News Corporation. So, is it a big deal?
Here’s a statement from Moody’s Investors Service, which said its credit ratings for News Corp. were not impacted by the UK report.
“Moody’s said that News Corporation’s (News Corp) significant cash balance and strong free cash flow generation mitigates the uncertainty of additional financial fallout from the phone hacking scandal, and does not anticipate a change in its Baa1 senior unsecured rating or outlook at this time. Ultimately, upon cutting through the highly politicized hyperbole, and honing into the potential total financial impact of the proceedings, so long as we believe that the company is able to mitigate potential costs by its significant liquidity and financial flexibility, there is no change warranted in its credit ratings or stable outlook.
The report, issued by UK’s Culture, Media and Sport Committee, which denounces News Corp Chairman and CEO Rupert Murdoch as ‘unfit’ to lead the company, represents an opinion without any direct regulatory implications. We believe it does, however, have the ability to influence Ofcom, UK’s regulatory body for communications, which is also conducting its own assessment which could have a bearing on News Corp’s ability to continue owning or governing a UK-licensed entity such as BSkyB (rated Baa1, stable) or its other UK assets.
Since BSkyB is not consolidated into News Corp’s financials, and Moody’s doesn’t proportionally consolidate them in our adjustments, its sale would not impact the company’s financial metrics, and even if it were a consolidated asset, it has a comparable credit profile and therefore would still not result in a material change in metrics. However, we view the asset as a core operation and an important source of financial flexibility for News Corp. We believe the company will have the ability to maintain such flexibility whether it is forced to become a passive investor by giving up its seats on BSkyB’s board or to sell its investment altogether, in which case it would receive significant after-tax cash proceeds from the sale. In such a scenario, we believe it would be more beneficial for News Corp to first become a passive investor which would give it some time to monetize at a time of its choosing rather than under duress, in order to achieve a better valuation, as opposed to having to resort to a fire-sale. Maintaining the current level of financial flexibility would depend upon use of any potential cash proceeds upon a sale, but we believe the company would likely apply such cash towards share repurchases which would reduce financial flexibility over time. However, we also believe that the company will maintain superior liquidity in the form of its significant cash balance.
There still remains great uncertainty as to any further financial impact beyond the known legal costs and settlements. It remains to be seen if the events will invoke any clauses in the US Foreign Corrupt Practices Act or the UK equivalent, and whether this would lead to hefty fines.
However, at this juncture, we believe that the potential worst case financial implications are mitigated by the company’s significant cash balance (over $9.4 billion at 12/31/2011, representing over 60% of its reported debt of almost $15.5 billion) as well as its consistent annual free cash flow generation of over $2.5 billion.
While we expect the company to continue repurchasing shares, we believe it will do so within reasonable bounds of its free cash flow generation, and will maintain its cash balance in the $7-$9 billion range over the course of any investigations and while any uncertainty as to the financial and legal consequences of the scandal remains. Moody’s believes that the large cash balance represents a very important cushion against uncertainty during times of distress. If the company were to significantly increase its shareholder friendly activities and materially reduce its significant cash reserves before the current tensions and uncertainty ease, the company’s credit rating could come under pressure.
Another way for the company to mitigate credit impact would be to reduce leverage. However, with under $300 million in debt maturing over the next twenty-four months, we don’t anticipate any material pay down of debt in the near future.”