Reuters logo
Fitch Affirms Bertelsmann at 'BBB+'; Outlook Stable
December 20, 2016 / 2:18 PM / a year 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: Additional information is available on 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. 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. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below