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Fitch Affirms Bertelsmann at 'BBB+'; Outlook Stable
December 20, 2016 / 2:18 PM / 9 months ago

Fitch Affirms Bertelsmann at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 20 (Fitch) Fitch Ratings has affirmed Germany-based Bertelsmann SE & Co KGaA's Long-Term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB+'; its Short-Term IDR is affirmed at 'F2'. The Outlook is Stable. Bertelsmann's ratings are anchored by its 75% ownership of leading pan-European commercial TV broadcaster, RTL and supported by a profitable core business portfolio. A conservative and stable dividend policy enables the group to retain a majority of free cashflow for investment purposes. This provides the company with financial flexibility and an ability to manage its credit profile while reshaping its business mix. A combination of restructuring, voluntary one-off pension payments and acquisitions over the past two years has reduced headroom within the rating. However, retained organic free cash flow provides the ability to maintain a leverage profile within the scope of a 'BBB+' rating. Fitch is adjusting the rating sensitivity measures it applies to Bertelsmann to reflect the company's progress in developing its digital business and reducing its exposure to print based media. The new measures reflect our view that Bertelsmann's operating risk profile is no longer higher than the industry average. KEY RATING DRIVERS RTL Underpins Profile: RTL is one of Europe's largest free-to-air TV broadcasters accounting for 61% of group EBITDA end-1H16. RTL benefits from fairly strong geographic diversification with market-leading channels in Germany, France, the Netherlands and Spain as well as from the ownership of its Fremantle content production arm. The diversification improves both the stability and visibility of revenues, which are driven predominantly by advertising and subject to cyclicality. Bertelsmann's other principal businesses are a 53% stake in books publisher Penguin Random House (PRH), magazine publisher G&J and services provider Arvato. Managing Sector Risks: Changing media consumptions patterns, evolving technology platforms and exposure to traditional media continue to represent medium- to long-term risks to the company's operating risk profile. Bertelsmann has taken steps to reduce this exposure by investing in new segments such as education and restructuring its asset portfolio. It is also investing in new platforms and faster-growing regions. Declining businesses, which in 2011 accounted for 16% of revenues, are likely to comprise less than 5% in 2016. Fitch views Bertelsmann's exposure to sector risk factors as no longer being higher than the sector average because of this progress. Revised Rating Sensitivities: The progress made on reshaping its portfolio and reducing its exposure to declining segments of the sector have led Fitch to increase the amount of Funds From Operations (FFO)-adjusted net leverage Bertelsmann needs to sustain a 'BBB+' rating by 0.5x to 2.5x from 2.0x. Once adjusted for its operating mix profile, the level is broadly in line with other western European and US media and entertainment companies rated by Fitch. Dividend Driven Investment Capacity: Bertelsmann has a stable and consistent dividend policy that distributes around EUR180m of dividends to its shareholders. This equates to around 20%-25% of annual group pre-dividend free cash flow. The policy is central to Bertelsmann's rating as it enables the company to retain between EUR600 and EUR650m a year (based on Fitch base-case forecasts), providing financial flexibility for managing sector risks, making investments to support revenue growth and reducing leverage if needed. Improving Leverage Headroom: Investments in restructuring and reshaping its portfolio saw FFO-adjusted net leverage spike in 2015 at 2.8x. This is expected to decline to about 2.2x by end-2017 driven by a combination of lower restructuring charges, growing EBITDA, reduced dividend leakage and improvements in working capital. This assumes the company continues to make EUR500m to EUR600m of potential acquisition investments annually from 2017. Any increase in debt as a result of raising gearing at the PRH level is not part of Fitch's base-case scenario. Pearson, which holds a 47% stake in PRH, is entitled to request an increase in leverage up to 3.5x EBITDA through exceptional dividends. Should the move occur, the impact on Bertelsmann's leverage profile will be dependent on the phasing and timing along with other concurrent investments the company may undertake. Shareholder-Driven Portfolio: Bertelsmann has an unique mix of media-related businesses with no immediate synergies. The collective rationale of these assets is a reflection of Bertelsmann's ownership structure with shareholders using Bertelsmann as a portfolio manager of majority-owned assets in order to exercise operational control. The group is owned by the Mohn Family (19.1%) and by non-profit operating foundations (80.9%). The structure adds conservatism to the company's risk profile for investments, its financing strategy and dividend policy. DERIVATION SUMMARY Bertelsmann has a relatively unique portfolio of assets spanning media, publishing, print and services businesses. Ratings are anchored by the ownership of leading pan-European commercial TV broadcaster RTL Group within its portfolio. While exposure to industry risks is broadly on par to the sector average, a greater proportion of cyclically exposed advertising-based revenues and a lower mix of subscription-based revenues at RTL drive potentially higher volatility in cash flows compared to other media companies such as RELX (BBB+/Stable) and CBS Corporation (BBB/Stable). This is reflected in tighter leverage metrics required to sustain a 'BBB+' rating. The constant retention of over 75% to 80% of free cash flow is rare in the sector and a key counter weight to these factors. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 0.8% in FY16, increasing to 1.5% by 2019; - EBITDA margins of 14.5%-15.0% between 2017 and 2019; - CAPEX of EUR550m-EUR600m annually across the rating horizon; - Stable dividend payments at EUR180m annually across the rating horizon; - Reduced net M&A expenditure over 2016/17 before increasing to EUR600m annually from 2018; - A continued conservative approach to financial policy in terms of capital structure and shareholder remuneration. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to negative rating action include: - FFO-adjusted net leverage (including profit participation certificates) above 2.5x on a sustained basis. M&A-induced leverage would be considered in the context of how accretive a deal is likely to be and the timeframe set by management to deleverage to more conservative levels. - Erosion of the core media business (TV advertising and book publishing) and Arvato as a result of adverse industry trends and operating performance. - Underlying pre-dividend FCF margin in the low single digits. Positive rating action is unlikely given the company's operational profile despite rather conservative financial metrics. LIQUIDITY Strong Liquidity Position: Bertelsmann has undrawn credit facilities of EUR1.2bn available until 2020 which, along with positive FCF and no significant debt maturities, provides sufficient liquidity across the rating horizon. Contact: Principal Analyst James Hollamby Analyst +44 20 3530 1656 Supervisory Analyst Tajesh Tailor Director ++44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Nikolai Lukashevich Senior Director +7 495 956 9968 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016779 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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