Disintermediation Growing Credit Rating Factor For Big Media
The Internet’s disintermediation of traditional mediums of distribution, continuing audience fragmentation pressures, and rapid technological advancement, are emerging as the new forces shaping the credit landscape for diversified media companies over the next ten years, according to Moody’s Investors Service. These concerns are displacing the consolidation that has framed the strategies of these companies for the prior decade and a half.
In a new report explaining its methodology for rating these companies, Moody’s notes that the media landscape continues to evolve with technology being the enabler of competitive advancements, and changes in the habits of the mass population. The consumer’s newfound ability to select the content that he or she seeks — exactly when and how he or she chooses — will disrupt traditional approaches to advertising-driven and costly “analog” or fixed one-way distribution (i.e. print) platforms, Moody’s says.
The Internet also erodes some of the once near-insurmountable barriers to entry, further crowding the media landscape and adding to the competition for the consumer’s time and for advertisers’ sponsorship. Among the Internet’s most powerful players, however, are the diversified media companies, the companies intent on heavily investing and consolidating within the medium.
Despite their often robust free cash flow generation, lower expected organic growth rates have diminished public valuation multiples for some of the diversified media companies, intensifying shareholder activism. Pressures to add to debt leverage, sell or break apart a media group, have historically often led to material declines in credit quality among these companies.
Moody’s explanation of its methodology is in line with its current actual ratings, though there are a couple of outliers that bear watching. The methodology shows Tribune Company as a negative outlier for Volatility. However, if Tribune’s LBO transaction is completed, the company’s rating will be lowered and the company will no longer be an outlier, Moody’s says.
Grupo Televisa is an outlier for Leverage despite a recent upgrade by Moody’s. This discrepancy reflects that while the company’s financial performance has been steadily improving and metrics are strong, the overall rating is constrained by concern over economic volatility, which would have a significant impact on company results, given its very high exposure to advertising cyclicality, Moody’s says.
Viacom is a positive outlier on the five-year average conversion of EBITDA to Free Cash Flow, due to the low capital intensity of many of the company’s businesses. Viacom’s overall rating is constrained by Moody’s concerns regarding pressure to increase share repurchases or for acquisitions, “combined with what we believe is a relatively limited likelihood that the board will check the controlling shareholder on these issues and the absence of bondholder protection provisions in the indenture to mitigate these concerns.”
The complete Rating Methodology Global Diversified Media Industry is available for purchase.
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