Fitch Downgrades Dow Jones' IDR to 'BBB+'; Outlook Negative.
--Issuer Default Rating (IDR) to 'BBB+' from 'A-';
--Senior unsecured debt to 'BBB+' from 'A-'.
Fitch has also affirmed Dow Jones' 'F2' short-term rating. The Rating Outlook is Negative.
Fitch originally placed Dow Jones on Rating Watch Negative in March 2006 after the company announced it had entered into a definitive settlement agreement to conclude all litigation with Market Data Corp. (MDC) and Cantor Fitzgerald Securities (Cantor) relating to Dow Jones' obligation under a guarantee it issued in 1995 to MDC and Cantor. In connection with the settlement, Dow Jones paid an aggregate $202 million to MDC and Cantor. The settlement was funded with Commercial paper. The $202 million settlement further delayed the prospects of de-levering from the MarketWatch transaction towards Fitch's initial expectations.
Further, as part of the Negative Rating Watch, Fitch believed there was the potential that the entire CP balance could be repaid through non-core asset sales or equity issuance. The resolution of the Negative Rating Watch comes on Dow Jones' announcement of a definitive agreement for the sale of their 6 Ottaway newspapers for after-tax proceeds of $268 million. Dow Jones has also given public guidance of use of proceeds which includes the acquisition of the remaining 50% stake in Factiva for $153 million (excluding $7 million preferred equity retained by Reuters) with the balance to be used for debt reduction.
While Fitch views the Factiva acquisition as strategically important for Dow Jones (further diversifying revenue away from traditional print), the downgrade reflects the lower than expected debt reduction, as well as general secular issues related to the newspaper industry. Advertising trends at Dow Jones' flagship product, The Wall Street Journal (WSJ), have been volatile and has continued to produce weak results in the midst of a generally healthy economy. This includes a weak September where advertising volume was down over 8% despite three additional editions of The Weekend Journal and the company's new initiative of front-page advertising. Advertising dollars are generally migrating away from newspapers toward emerging media in part due to the high cost of newspaper advertising. Fitch notes that the WSJ is premium priced relative to other newspapers, and may be challenged to raise and/or retain pricing in this environment.
The 'BBB+' IDR continues to be supported by Dow Jones' strong brands, diversification of revenues and proforma credit metrics that are reflective of a 'BBB+' rating given the company's business risks. Factoring in expected outflows, inflows and cost savings from current initiatives including debt reduction from the aforementioned Ottaway sales, incremental cash flow from the Factiva acquisition, reduced headcount, divestiture of its CNBC International stake, width reduction of The WSJ International and domestic editions, front page advertising, color capacity expansion, and outsourcing initiatives, Fitch believes there is potential for significant improvements in current metrics over the next few years. Importantly, individually paid subscriptions at WSJ increased by over 9% for the six-month period ended September 2006, according to the Audit Bureau of Circulation.
The Negative Outlook reflects the general pressure facing traditional advertising based media such as newspapers, as well as the integration and execution risk related to the aforementioned initiatives (risk to the Factiva integration partially mitigated by management's previous experience). Given Fitch's estimates of pro forma metrics, and the potential for further business diversification, Fitch believes the 'BBB+' ratings can be stabilized over the next six-to-nine months.
While Fitch has a negative view on the newspaper space, Dow Jones is more diversified than many of its traditional print competitors. Proforma for the Factiva transaction, Fitch estimates print revenue as a percent of total revenue will decrease from approximately 70% to below 60% and that over 35% of Dow Jones' revenues will come from the Enterprise Media Group, which includes Dow Jones Newswires, Factiva, and Dow Jones Indexes. While other newspaper companies have other media business lines such as TV broadcasting, these segments are also experiencing secular challenges and are highly correlated to the cyclicality of newspapers since they also depend on advertising revenue. Pro Forma for the Factiva acquisition, Fitch estimates Dow Jones will have less than 50% of its revenue dependent on traditional media advertising. Given its strength of brands, Dow Jones has also been successful at generating a paid subscriber base for its online products.
Fitch expects liquidity to improve with the closing of the Ottaway sale. Dow Jones currently has a $300 million revolver that matures 2009 and a $185 million revolver that matures 2011. At Sept. 30, 2006, Fitch estimates there was approximately $40 million in revolver availability on the two long term facilities. Proforma for the Ottaway proceeds, Fitch expects revolver availability on these facilities to exceed $150 - 200 million by year-end 2006. Dow Jones also has a $250 million 18-month facility that was put in place on March 27 to cover the Cantor/MDC settlement. The credit agreements contain a maximum leverage covenant of 3.5 times (x) and a change of control provision that allows for acceleration of payments should anyone outside of the Bancroft family obtain more than 35% of the voting stock. The indenture contains a cross-acceleration provision.
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|Date:||Oct 31, 2006|
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