The upgrade from “B” follows “the significant improvement in Lionsgate‘s credit metrics since it closed on the acquisition of Summit Entertainment in 2012,” Standard & Poor’s Ratings Services analyst Naveen Sarma says. After paying down some debt, and raking in big profits from movies including The Hunger Games, Lionsgate’s borrowings amount to 4.3 times its cash flow — a steep drop from last year when debt was more than 40 times. The ratio should improve, S&P says, as the studio releases additional Hunger Games films and expands its “more predictable television production revenues.” Although the debt ratings company deems the outlook for Lionsgate to be “stable,” it considers the business risk to be “weak” due to the company’s exposure to the unpredictable film business. “We view the more stable revenue and cash flow from its growing TV production segment (15% of consolidated revenues), and longer-term upside from the growth of digital distribution, as modestly tempering the feature film risks.” Equity investors remain enthusiastic: Lionsgate shares are up 68.5% so far in 2013.
The financial community is thumbs-up on Lionsgate’s $412.5M acquisition of Summit Entertainment. Lionsgate shares appreciated 6.3% since the companies announced the deal on Friday. And today Standard & Poor’s Ratings Services said it’s considering raising Lionsgate’s debt rating from its current ‘B-’. The deal “modestly improves Lionsgate’s business risk profile, mainly on account of increased leverage over exhibitors and creative capabilities,” credit analyst Deborah Kinzer says. Don’t throw the confetti yet, though: Considering how volatile the film business is, and how much it costs to make movies, “we would most likely assess the combined company’s business risk profile as ‘vulnerable’ or ‘weak’,” she says. S&P won’t decide whether to raise the credit rating until it meets with management. “Key ratings considerations will include the combined company’s pro forma liquidity position, production strategy, and acquisition orientation under the new structure,” says Kinzer. Earlier today Miller Tabak & Co analyst David Joyce said that Lionsgate “could pay down the Summit related debt with cash flow from The Hunger Games and the upcoming Twilight: Breaking Dawn Part 1 home entertainment release and the theatrical and home entertainment releases of Breaking Dawn Part 2 in 1H15 if not earlier.”
The benchmark Standard & Poor’s 500 was up 4.3% today after central banks in the U.S., Europe, and Japan said that they’d help supply cash to avoid a credit crunch if the European debt crisis worsens. That buoyed media stocks: The Dow Jones U.S. Media Index was up nearly 4.4%. CBS shares rose 5.8%, giving it the biggest bump among the elite group of Big Media companies. It was followed by Disney (+5.4%), News Corp (+5.4%), Time Warner (+4.3%), Viacom (+4.3%), Comcast (+4.2%), and Sony (+2.7%). Among other media companies, Westwood One and The New York Times were up more than 10%. Companies up more than 9% include Outdoor Channel, LIN TV, and Entercom. Only a few companies lost ground. The hardest hit was Netflix, down 4.5% after Wedbush Securities’ Michael Pachter downgraded the video rental firm to “underperform” from “neutral.” His rationale: “We think that the company’s pricing structure is wrong, and its business model is broken. At current prices, we expect Netflix to continue to lose more hybrid (DVD and streaming) customers than it adds, and those who remain will not be particularly profitable.”
This seems to be just what many angry shareholders wanted. Activist hedge fund Jana Partners and the Ontario Teachers’ Pension Plan Board lobbied for just such a change in July when they bought 5.2% of the publishing, investment analysis and TV station company. The concern is that the hefty profits at S&P were being diluted by the capital-intensive textbook operation. McGraw-Hill CEO Terry McGraw is no fool: He’ll stick with S&P. Meanwhile, there no word on who might buy McGraw-Hill’s four TV stations that the company put on the block in June.
NEW YORK, Sept. 12, 2011 — The McGraw-Hill Companies (NYSE: MHP) today announced that its Board of Directors has unanimously approved a comprehensive Growth and Value Plan that includes separation into two strong public companies: McGraw-Hill Markets, primarily focused on capital and commodities markets, and McGraw-Hill Education, focused on education services and digital learning.
The three-part Plan is designed to accelerate growth and increase shareholder value by:
1. Creating two “pure-play” companies with the scale, and the capital and cost structures to fully leverage their world-class franchises, iconic brands, and leading market positions
2. Reducing costs significantly to ensure efficient operating structures for the two new companies
3. Accelerating the pace of share repurchases to a total of $1 billion for the full year 2011 (approximately $540 million repurchased year to date)
The Growth and Value Plan will create two focused operating companies with deeper customer engagement,
Walt Disney Co plans to sell $750 million worth of both five- and 10-year notes and $350 million of 30-year bonds, issuing its first 30-year debt in almost a decade. Disney is selling bonds for the second time this year despite Standard & Poor’s saying the company already has “exceptional liquidity.” But the Fed this week signaled it plans to keep interest rates at a record low through the middle of 2013, meaning companies are taking advantage of the low borrowing costs and investors being more likely to seek longer-term bonds and their higher yields. A source told Bloomberg that the proceeds will be used for general corporate purposes but that terms for the deal have not been set.
UPDATE 4:10 PM: The markets couldn’t sustain an early afternoon rally amid concerns that France might lose its AAA debt rating and that Spain or Italy might default on payments. The Dow Jones Industrial Average fell 4.6% while the S&P 500 dropped 4.4% and NASDAQ was down 4.1%. But media companies were mixed, with some showing big improvements from mid-day. Disney remained the hardest hit of the Big Guns with shares falling 9.1%. It was followed by Sony (-5.7%), CBS (-5.4%), News Corp (-4.7%), Time Warner (-4.6%), Comcast (-4.5%), and Viacom (-0.3%). Among other media companies, Crown Media, Westwood One, and E.W. Scripps fell at least 10%. Entercom, The New York Times, and Gannett were off at least 9%. And Martha Stewart Living Omnimedia, AOL, and LIN TV were down at least 8%. Some companies were up including Cinedigm (+8.7%), National CineMedia (+4.3%), New Frontier Media (+2.7%), DreamWorks Animation (+2%), Lionsgate (+1.8%), Pandora Media (+0.6%), and Coinstar (+0.1%).
PREVIOUS, 9:00 AM: Here we go again. Stock markets at mid-day have given up just about all of yesterday’s gains following the Fed’s pledge to keep interest rates low — and media companies are being hammered. The Dow Jones U.S. media index is -4.7% while the Dow Jones Industrial Average is -4.1%. Similarly the S&P media index is off 5.5% while the S&P 500 is -3.8% and NASDAQ’s media shares are -4.8 vs. the overall exchange which is -3.3%. Here’s how industry giants are faring at mid-day: Disney (-10.7%), CBS …
Look out McGraw-Hill. Activist hedge fund Jana Partners and the Ontario Teachers’ Pension Plan Board have bought 5.2% of the publishing, investment analysis and TV station company — and say that they may try to break it up. The investors reported in SEC filings today that they have “no present plan or proposal” for the company run by CEO Terry McGraw. But they plan to talk to McGraw-Hill’s directors, shareholders, and others about changes “to improve shareholder value.” That could include changes in McGraw-Hill’s “business, operations, management, board composition and representation, corporate structure, strategy and future plans,” they say. The news contributed to a 5.5% increase in McGraw-Hill’s share price in after-hours trading. The company is already trying to reorient itself. Last year it sold BusinessWeek magazine to Bloomberg, and it recently put its TV station group on the block. The company’s best-known properties include Standard & Poor’s and J.D. Powers Associates.