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Fitch: No Rating Impact on Bertelsmann from Increased Stake in PRH
July 14, 2017 / 1:36 PM / 5 months ago

Fitch: No Rating Impact on Bertelsmann from Increased Stake in PRH

(The following statement was released by the rating agency) LONDON, July 14 (Fitch) Fitch Ratings says there is no impact on Bertelsmann's ratings (BBB+/Stable) from the Penguin Random House (PRH) transaction. Bertelsmann announced it intends to increase its stake in PRH by acquiring a further 22% from current owner Pearson and undertake a capital increase at PRH. Together this is expected to amount to around EUR850 million (USD968 million). The transaction will take Bertelsmann's ownership of PRH to 75% from 53% with Pearson retaining a 25% holding. The move is broadly in line with Fitch's expectations (see "Fitch: No Rating Impact on Bertelsmann from Stake Increase in PRH" dated January 2017) and will not impact Bertelsmann's rating due to the company's strong retained free cash flow, reduced dividend leakage and leverage headroom. The transaction gives Bertelsmann greater control over a key part of its operations by virtue of its enlarged stake and new ability to appoint PRH's Chairman. PRH accounted for 20% of group revenues in 2016 and is a global leader in book publishing. The transaction also introduces a simpler agreement between Bertelsmann and Pearson, replacing a more complex agreement that existed under the previous ownership structure. Under the new agreement Pearson no longer has a right to IPO its remaining shareholding while Bertelsmann has retained a right of first offer for Pearson's remaining stake. Fitch also assumes that as part of the new agreement, Pearson has lost its previous right to increase PRH's net debt to EBITDA to 3.5x. In addition to the increased stake, Pearson and Bertelsmann have agreed to recapitalise PRH through exceptional dividend payments that will raise leverage in two steps at the unit to 2.0x net debt to EBITDA. The first step will increase leverage in 2017 to 1.5x and the second step (to be executed in April 2018) will add a further 0.5x. Following its bond issuance in May 2017, Bertelsmann has sufficient liquidity to fund a substantive portion of the stake increase and recapitalisation through existing cash resources. Fitch expects Bertelsmann's funds from operations (FFO) adjusted net leverage to increase by around 0.1x to 0.2x in 2017 and 2018 as a result of the transaction. Upon successful completion, FFO adjusted net leverage should be 2.3x at the end of 2018. Bertelsmann generates around EUR600 million to EUR700 million of post dividend free cash flow per year that provides significant financial flexibility to fund inorganic expansion. At the same time, the increase in the stake reduces dividend leakage to minorities, which has a positive impact on FFO. In 2016, dividends paid to Pearson for its 47% stake in PRH was EUR149 million. Fitch has treated cash flow in relation to the dividend capitalisations as exceptional in nature and consequently these do not impact Bertelsmann's FFO. Contact: Tajesh Tailor Senior Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Rachel Chin Associate Director +44 20 3530 1629 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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