Aug 21 -
Summary analysis -- The Walt Disney Co. --------------------------- 21-Aug-2012
CREDIT RATING: A/Stable/A-1 Country: United States
Primary SIC: Motion picture
Mult. CUSIP6: 254687
Mult. CUSIP6: 25468P
Mult. CUSIP6: 25469H
Mult. CUSIP6: 2546R0
Mult. CUSIP6: 2546R1
Mult. CUSIP6: 2546R2
Mult. CUSIP6: 2546R3
Mult. CUSIP6: 2546R4
Mult. CUSIP6: 2546R5
Credit Rating History:
Local currency Foreign currency
05-Oct-2007 A/A-1 A/A-1
02-Jun-2005 A-/A-2 A-/A-2
Standard & Poor's Ratings Services' corporate credit rating on Burbank, Calif.-based entertainment conglomerate The Walt Disney Co. incorporates Disney's leading, wide-ranging creative franchises and distribution capability, underpinning our assessment of its business risk profile as "strong," based on our criteria. Disney's financial risk profile is "modest," based on a fully adjusted debt-to-EBITDA ratio of less than our 2.0x threshold for the 'A' rating, good cash-flow generating ability, exceptional liquidity, and a financial policy balancing conservative credit metrics with shareholder-friendly initiatives and acquisitions. The stable rating outlook reflects our view that Disney's business performance will remain strong, particularly at the cable networks, and that management will maintain its current financial policy.
Disney's businesses encompass cable and broadcast networks, theme parks and resorts, filmed entertainment, video games and other interactive media, and sales of (and character licensing for) consumer products. Disney leverages its content across virtually all of its businesses, which is one of its key competitive strengths. Its ESPN and Disney Channel cable networks are audience rating leaders; its theme parks are well managed and maintain their premier status worldwide. That said, some of Disney's business units are underperforming: The ABC Television Network has been unable to reestablish a sustainable leadership position, and its studio's competitive stronghold in family entertainment has remained weak, scoring only a few hits in the past few years amid some significant disappointments. Disney's filmed entertainment business has relied on acquired entities such as Pixar and Marvel for many, if not most, of its recent successes. Like its competitors, Disney's entertainment businesses face the risks of evolving digital technology and ongoing audience fragmentation.
Our base-case scenario for fiscal 2013 includes mid-single-digit percentage revenue growth and about 10% EBITDA growth. Key assumptions in our scenario include 2% GDP and 2.3% consumer spending growth, respectively, for calendar 2013; improved revenue growth in the media networks business (partly because most election advertising revenue will be recorded in the company's fiscal 2013 first quarter); and a pickup in revenue growth in the parks segment, aided by the expanded cruise ship business. We expect expenses will rise more slowly than revenue, leading to higher EBITDA growth and improvement in the EBITDA margin to 26%, from 25% as of June 30, 2012.
In the fiscal third quarter ended June 30, 2012, Disney's EBITDA rose 17% year over year on 4% revenue increase. EBITDA grew for all segments in the quarter, led by studio entertainment (benefitting from Marvel's The Avengers), parks, and consumer products. Media networks EBITDA was up only about 3% on increased programming and production costs. Disney's EBITDA margin improved to 25.9% for the 12 months ended June 30, 2012, up strongly from 23% in the year-ago period.
Disney's businesses continue to generate strong cash flows, but discretionary cash flow fluctuated over the past few years because of park expansion and high costs for construction of two new cruise ships (launched January 2011 and March 2012). Conversion of EBITDA into discretionary cash flow was 32% for the 12 months ended June 30, 2012, up from 30% one year ago, on higher EBITDA. Under our base-case scenario, discretionary cash flow will rise significantly in fiscal 2013 because of continued EBITDA growth coupled with sharply lower capital spending. In the intermediate term, we expect management will use its cash flow for share repurchases and acquisitions.
The ratio of debt to EBITDA (fully adjusted for leases, pensions, and securitizations) was 1.7x as of June 30, 2012, unchanged from a year ago and below our 2.0x threshold for the company at the 'A' rating level. We expect leverage to remain below 2x for the foreseeable future, barring a reversal of EBITDA gains, a significant debt-financed acquisition, or a change in management's financial policy. Disney's key credit ratios are in line with our financial risk indicative ratios for a modest financial risk profile. The company's ratio of funds from operations (FFO) to debt is about 57%, compared with a range of 45% to 60% for a modest financial risk profile under our criteria, and its 1.7x debt to EBITDA is within the indicative range of 1.5x to 2.0x.
We regard Disney's liquidity as "exceptional," as defined in our criteria, based on the following assumptions and factors:
-- We expect sources of liquidity to cover uses by more than 2x over the next two to three years.
-- Sources will still significantly exceed uses, even if EBITDA declines 50%.
-- Disney has an ample cushion of compliance with its credit facility covenant of 3x EBITDA coverage of interest. Per the covenant calculation, it had a 94% EBITDA cushion of compliance for the 12 months ended Dec. 31, 2011.
-- It would be able to absorb, without refinancing, high-impact, low-probability events, as in in 2001, late 2008, and early 2009.
-- It has well-established and solid relationships with its banks, in our assessment.
-- Although our liquidity analysis assumes it repays maturing debt with cash, Disney has a high standing in the credit markets and exceptional access to capital.
-- Management exercises very prudent risk management, which was exhibited by its steady credit profile during the 2008-2009 recession.
Our analysis assumes liquidity sources of about $2 billion from cash balances, about $2.3 billion of unused revolving credit facilities (net of commercial paper outstanding), and funds from operations of $8.5 billion in fiscal 2013. We also assume annual cash uses totaling about $200 million for working capital needs and capital expenditures of about $3 billion in fiscal 2013 as construction of cruise ships and park attractions tails off. We expect shareholder dividends of $1.2 billion in fiscal 2013, and debt maturities of about $2 billion in fiscal 2013. This leaves about $6.1 billion to $6.4 billion of excess liquidity per year, which Disney will use for share repurchases and acquisitions.
The stable rating outlook reflects our expectation that Disney will maintain its leverage within our 2.0x threshold for our 'A' rating. A downgrade scenario is plausible, but not highly likely. We could lower our rating if future developments cause Disney's leverage to rise above our threshold, with no prospect of declining in the intermediate term. This could happen if a reversal of the economic recovery triggers a sharp decline in revenue and EBITDA without a corresponding debt reduction, or if Disney makes a significant debt-financed acquisition. A decline in revenues and EBITDA in fiscal 2012, with share repurchases and acquisitions in excess of $4 billion, and a shift in financial policy that suggests little prospect for leverage returning to our threshold, could prompt us to lower the rating. An upgrade, which we do not anticipate over the intermediate term, would require the company to commit to lowering and maintaining leverage below 1.5x throughout the economic cycle. In our view, management considers an 'A' rating as offering the optimal balance between cost-of-capital benefits and the accommodation of its agenda for growth and shareholder returns.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008