Moody’s Investors Service crunched the numbers on a possible Comcast-21 Century Fox combination, determining the deal would dramatically increase its debt load, making it the second highest leveraged company behind AT&T.
Comcast has made a formal offer for British satellite company Sky – of which Fox owns 39% -- for $31 billion, but it hasn’t done the same yet for Fox assets currently betrothed to The Walt Disney Co. Comcast is expected to crash that wedding only if AT&T’s pending $108.7 billion purchase of time Warner Inc. is approved by regulators.
But Comcast has been said to be lining up banks for a possible bid, and reports have estimated the cable giant will offer about $60 billion in cash for the Fox assets.
In a note Tuesday, Moody’s said a debt-financed (all-cash) bid for Fox would be a big departure from Comcast’s existing fiscal policy, ticking up its leverage ratio to about 4.1 times cash flow. Comcast’s current leverage ratio is about 3 times cash flow, but Moody’s said that a target of 2.75 times is more appropriate for its current rating.
“Adding a cash bid for Fox on top of the company's debt-financed $31 billion bid for Sky Plc, means pro forma consolidated debt would increase the company’s consolidated debt from just under $65 billion to a staggering $164 billion, pro forma for the acquisitions, excluding any cash flow that Comcast would generate before the transactions would close,” Moody’s wrote.
That $164 billion obligation would be second only to AT&T’s potential $185.3 billion debt load after the Time Warner deal closes. And Moody’s said the Comcast leverage is after about $3 billion in cost synergies are considered. To get back to the recommended 2.75 times mark suggested for its investment grade A3 debt rating, Moody's says Comcast would have to pay off about $50 billion in debt. Given it is expected to generate about $10 billion to $11 billion in free cash flow annually, that could take more than four years.
Moody’s noted that Comcast has been consistent in its approach to debt in past acquisitions – its purchase of the remainder of NBC Universal from General Electric briefly stretched debt metrics. But it agreed to purchase Time Warner Cable with all-stock (a deal that was scrapped over regulatory issues), and bought DreamWorks Animation and purchased stakes in its theme park ventures with cash on hand or minimal leverage.
“When assessing creditworthiness, we consider both the willingness of management and the company's ability to attain and sustain credit metrics as equally important,” Moody’s wrote. “… Sharp departures from past practice and stated commitments, particularly as companies move up the rating scale, create significant doubts about commitments in the future.”