As the fight over 21st Century Fox assets continues to rage for The Walt Disney Co. and Comcast, Moody ‘s Investors Service said Friday that the best outcome for bondholders of all three companies would be for Disney’s cash and stock deal to prevail, with Comcast taking the consolation prize of British satellite TV giant Sky.
Disney has offered $71.3 billion in cash and stock for the Fox assets, besting Comcast’s $65 billion bid. Disney said Thursday that it has scheduled a special meeting July 27 in New York for shareholders to vote on the bid. Comcast is expected to make a higher bid sometime before that date.
In April, Comcast made a separate offer for Sky valuing the company at $31 billion. That offer is still being considered.
In a research note, Moody’ said that Disney, with a “stronger balance sheet and a commitment to lower leverage,” has a better chance of bringing overall debt back to acceptable levels with its cash and stock offer for Fox.
The credit-rating agency also believes Disney-Fox and Comcast-Sky makes more strategic sense.
“Disney’s ability to monetize intellectual property across all of its lines of business is second-to-none in the industry,” Moody’s wrote. “A Comcast-Sky marriage makes strategic sense because both are pay-TV providers and Comcast is a cable distributor first, content company second.”
Moody’s has already said that a Comcast-Fox combination would create the second most highly leveraged company – behind AT&T-Time Warner – with a $170 billion debt load. And as the bidding goes higher, so does the debtload.
In his report, Moody’s senior vice president Neil Begley estimated if Disney acquired both the Fox assets and Sky, its leverage ratio would be about 4 times forward looking cash flow. With just Fox, leverage ticks down to about 3.5 times. Neither of those figures accounts for any asset divestitures or the planned spin off of Fox’s regional sports networks, which was a condition of federal approval of the deal earlier this week.
“[W]e believe if Disney commits to using all of its free cash flow to reduce debt, avoiding share repurchases or other material debt-financed transactions, it can bring leverage back down to the low-2x range within 24 months of the deal closing,” Begley wrote. “That will give Disney a good chance at maintaining its A2 rating, particularly as it is required for them to sell the RSNs under the DOJ consent for approval, and potentially could sell other assets, which would help achieve that leverage level more quickly.”
Comcast, whose bid is all cash and mainly financed through banks, would see its leverage ration climb to 4.4 times if it bought both the Fox assets and Sky, dropping to 2.9 times in a Sky-only purchase. Moody’s said it believes Comcast could use its free cash flow to take down leverage in a Sky-only deal to about 2.5 times within a year of closing the deal.
“We believe Comcast’s leadership in pay-TV innovation pairs well with Sky’s and Comcast’s expertise in operating an efficient cable distribution network in the US provides less risk when acquiring another cable distribution company, while a company such as Disney has no experience in the distribution of television and broadband connectivity,” Begley wrote. “In addition to the two companies (Comcast & Sky) sharing technology, they can also share non-licensed content, spreading these costs over a larger subscriber base. An acquisition of Sky, with operations in the UK, Germany, Italy, Ireland, Austria and Spain, will also provide Comcast with considerable geographic diversification it does not have.”
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