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News Corporation -- Moody's assigns Ba1 CFR to News Corporation and Ba2 to new $750 million notes, outlook is stable

Rating Action: Moody's assigns Ba1 CFR to News Corporation and Ba2 to new $750 million notes, outlook is stableGlobal Credit Research - 07 Apr 2021New York, April 07, 2021 -- Moody's Investors Service ("Moody's") assigned to News Corporation ("News Corp or the Company") a Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default Rating (PDR), SGL-1 Speculative Grade Liquidity Rating and Ba2 to the Company's new $750 million senior unsecured notes (the Notes). The outlook is stable.News Corp is issuing $750 million of senior unsecured notes maturing 2029. The proceeds will be used for general corporate purposes which may include acquisitions and working capital.The Company has also recently announced its intention to acquire the Houghton Mifflin Harcourt ("HMH") Books & Media segment for $349 million, Investor's Business Daily ("IBD") for $275 million and Mortgage Choice (through its REA Group subsidiary) for AUS $244 million (USD $186.5 million). We expect the note proceeds and existing balance sheet cash will be used to fund these and potentially other acquisitions.Assignments:..Issuer: News Corporation.... Corporate Family Rating, Assigned Ba1.... Probability of Default Rating, Assigned Ba1-PD.... Speculative Grade Liquidity Rating, Assigned SGL-1....Senior Unsecured Regular Bond/Debenture, Assigned Ba2 (LGD4) Outlook Actions: ..Issuer: News Corporation ....Outlook, Stable RATINGS RATIONALE News Corp's Ba1 CFR is supported by a conservative financial policy, modest financial leverage (projected between 1.75-2.0x, Moody's adjusted gross debt/EBITDA), and very good liquidity. Additionally, the company has good scale (over $8 billion in revenue, Moody's adjusted at year end 2020) and business line diversity. The company generates multiple revenue streams from 5 distinct operating segments across three major geographies. This level of diversity provides a fair degree of balance to the business model, with at least three growth segments, offsetting the weaker ones. The Company also owns and operates some of the world's leading brands including the Wall Street Journal, HarperCollins, and Realtor.com. The strength of these brands and businesses, with many having leading market positions, helps to defend its market positions and expand its reach to new digital platforms.The Company's credit profile is constrained by EBITDA margins in the mid-teens range, and multiple segments exposed to unfavorable secular trends, which pressure revenues and profitability. Its levered video business, Foxtel, is losing linear pay-tv subscribers and we believe there is little if any equity value attributable to the investment after close to $2 billion in write-downs, which approximates the company's initial investment. In the News Media segment, which accounts for about 24% of total revenues (for the quarter ended December 31, 2020), we expect the segment top line to decline by the mid-teens percent with weakness in print advertising and newspaper circulation. The segment is also the least profitable, producing low single digit percent EBITDA margins.Moody's believes the company is committed to investing into its growing digital businesses, with a strategic transformation that includes selling non-performing assets and non-core businesses while allocating capital to M&A and investments that build its core growth engines. As management has been executing on this strategy, we have observed material and favorable changes in the segmental and revenue mix of the company, with a steady rise in the contribution of digital subscriptions. At the same time, the EBITDA contribution from the News Media segment, the most exposed segment, represents 13% of total EBITDA (for the quarter ended December 31, 2020). We expect this transformation to continue, leading to a more stable and profitable business model over time. The company reported very strong operating performance in the first half of the fiscal year, with a sharp a recovery in nearly all segments of the business, with strong growth in revenue, EBITDA and free cash flows. Additionally, we believe the agreements with the major social media players, including Apple, Facebook, and Google, to license news content on their platforms, are landmark events that could transform the economics of not only News Corp's News Media segment, but the entire industry. These are precedent-setting, establishing a new and more profitable relationship with the most dominant digital media platforms in the world.News Corp is exposed to governance risk, including the closely held nature of the organization (the Murdoch Family Trust and Rupert Murdoch collectively control 39.4% through Class B shares), tolerance for a high dividend payout, potential changes in leadership upon inevitable succession, history of activist investors, and event risk with the current strategy to reorder the portfolio of businesses with a stronger mix of digital media assets. This will likely entail divesting non-core, weak performing assets and acquiring new ones with debt-financed M&A, in addition to making investments in the core segments. Despite the cost and risk of transacting, the management has a long and steady history of maintaining a conservative financial policy and very strong liquidity, with low leverage ratios and significant cash balances. Management has taken patient, long-term views with respect to strategic decisions and shareholder cash returns, has maintained strong cost controls, and a disciplined M&A strategy. Management targets a 1.5x gross leverage ratio (total debt/EBITDA) and 1.0x net ratio. Moody's leverage metrics include analytic adjustments for lease and pension obligations as well as adjustments to proportionally deconsolidate non-controlling interests, which we estimate has added up to 1.25x turns of leverage in historical periods. We believe management has some tolerance to temporarily exceed their leverage targets for opportunistic M&A, provided there is a clear path to return to target leverage within 18-24 months. The reported gross and net leverage ratio were inside management's tolerances as of the last quarter end.The coronavirus has negatively disrupted some of News Corp's operations in varying degrees (especially those exposed to print publishing circulation, advertising revenue, and small businesses). Business closures (including pubs, clubs and hotels), social distancing measures, the cancellation of production and sporting events and related programing, have all put pressure on revenues. However, despite these challenges and the long-term secular headwinds in legacy video and News Media segment, the business has been improving with the slow but steady economic recovery. There are also fundamental social changes that are driving long-term growth in many parts of the company's segments including digital real estate, books, and in digital news subscriptions. In particular, the company is experiencing a very significant rise in digital subscribers and related fees as consumers continue to shift their consumption to digital, over the internet and connected devices.News Corp has an SGL-1 Speculative Grade Liquidity rating, which indicates very good liquidity. The liquidity profile is supported by significant cash balances that we expect to be sustained above $1 billion, positive operating cash flow, significant back-up liquidity with approximately $750 million in revolving credit facilities that are largely undrawn (excluding subsidiary facilities), and substantial alternate liquidity with no secured debt in the capital structure.The notes will be an obligation of the parent company, and not guaranteed by operating subsidiaries. The notes will rank equally in right of payment with all existing and future senior debt, including the existing revolving credit facility, and rank senior to all existing and future subordinated debt. The notes will be subordinate to all existing and future secured debt and structurally subordinate to all existing and future liabilities of each the Company's operating subsidiaries. The notes will be non-callable for 3 years and is subject to repayment upon a change in control. The senior unsecured notes are rated Ba2 (LGD-4), one notch below the CFR given the lack of subsidiary guarantees, subordinating the claim to the more senior payables, lease and pension obligations at the operating subsidiaries. The instrument rating reflects the probability of default of the company, as reflected in the Ba1-PD Probability of Default Rating, and an average expected family recovery rate of 50% at default.The stable outlook reflects our expectation that debt, revenue, and EBITDA will average approximately $2.9 billion, $8.3-$8.7 billion, and $1.3-$1.6 billion, respectively, over the next 12-18 months. We project EBITDA margins rising above mid-teens percent, producing free cash flows at least $400 million, after capex (averaging 5%-6% of revenue), borrowing costs (averaging 5%), and dividends (approximately $160 million). We expect leverage to be 1.75x-2.0x, and free cash flow to debt to rise over 15%, and for liquidity to remain very good.Note: All figures are calculated based on Moody's standard adjustments, pro forma for pending material transactions (acquisitions and divestitures), constant currency, and normalized to proportionally deconsolidate material non-controlling interests in certain businesses (including Foxtel, REA, and Move). Adjusted debt includes lease and pension debt, mostly lease obligations.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgrade:» Maintenance of conservative financial policies targets, modest leverage and very good liquidity» Sustained growth in digital assets, supported by profitable execution of transformation strategy» Track record of strong free cash flow generation, with free cash flow to debt (Moody's adjusted and normalized) sustained above high single digit percentFactors that could lead to a downgrade» Gross Debt/EBITDA (Moody's adjusted and normalized) is sustained above 3.0x, or» FCF/gross debt (Moody's adjusted and normalized) is sustained below mid-single digit percentWe would also consider a negative rating action if the financial strategy or policy turned more aggressive, or operating performance weakened considerably such that the company's market or financial position implied a weaker credit profile.The principal methodology used in these ratings was Media Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1077538. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.News Corporation (Nasdaq: NWS, NWSA; ASX: NWS, NWSLV) is a global, diversified media and information services company focused on creating and distributing authoritative and engaging content and other products and services. The company comprises businesses across a range of media, including: digital real estate services, subscription video services in Australia, news and information services and book publishing. Headquartered in New York, News Corp operates primarily in the United States, Australia, and the United Kingdom, and its content and other products and services are distributed and consumed worldwide. Revenues for the last twelve months (LTM) ended December 31, 2020 was approximately $8.7 billion (as reported).REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Jason Cuomo Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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