Daily Mail & General Trust PLC Ratings Lowered To 'BB' And Removed From CreditWatch Negative; Outlook Stable

  • Daily Mail & General Trust PLC (DMGT, the group) has completed the distribution of its stake in Euromoney to shareholders, along with an additional cash distribution of £200 million.
  • We are downgrading DMGT to 'BB' from 'BB+' and removing the ratings from CreditWatch negative, where we placed them on March 7, 2019.
  • We are also lowering to 'BB' our issue ratings on DMGT's senior unsecured bonds.
  • The stable outlook on DMGT reflects our view that the group has some headroom under the 'BB' rating.
LONDON (S&P Global Ratings) April 17, 2019--S&P Global Ratings today took the rating actions listed above. The downgrade follows DMGT's announcement that it has distributed its stake in Euromoney to certain holders of A Shares, together with a £200 million cash distribution from existing cash reserves. Additionally, the group has set aside £117 million in cash to fund the group's pension schemes, with the final funding requirement pending the outcome of an upcoming triennial actuarial plan review.
We think the transaction weakens DMGT's capital structure strength and flexibility, through the distribution of cash and equity value to shareholders. We also estimate that, following the transaction's completion, DMGT--with revenues of £1.43 billion for the financial year ending Sept. 30, 2018 (FY2018)--will have lower S&P Global Ratings adjusted EBITDA and margins. This is due to the loss of Euromoney dividends and a revision of our assumptions regarding potential pro forma bolt-on acquisition earnings. The transaction will result in the consumer media division contributing a larger proportion of the group's adjusted earnings, which we generally view unfavorably. We have therefore revised downward our view of the strength and robustness of the group's operations.
However, from a net cash flow standpoint, we expect the pro forma reduction in dividends payable to DMGT shareholders will be greater than £29 million. This is larger than the loss of the Euromoney dividend receipts, which we had estimated at about £18 million in our prior FY2019 forecast. This is due to the reduction in A Shares, leading to a net cash flow benefit after financing cash flows. We treat the loss of Euromoney dividends as a loss of operating cash flow, whereby the reduction in dividends to DMGT shareholders is a discretionary (financing) cash flow.
Under our base-case scenario, we now forecast adjusted leverage of 2.0x–2.5x in FY2019-FY2020. This includes no netting of surplus cash, which we now view as available for a combination of working capital and operational needs, pension funding requirements, or bolt-on acquisitions over time. As a result, we view the group as having some flexibility under the current 'BB' rating. The rating does not factor in any material disposals, which could further decrease the group's scale, diversification, earnings, and margin profile.
The stable outlook reflects our view that although we anticipate DMGT's adjusted earnings will remain under pressure in the next 12 months from a continued structural decline in print media and potentially from further small portfolio disposals, we think the group has some headroom under the current rating level. Our FY2019 base case takes into account continued pressures in media, but it also takes into account relatively stable low-single-digit growth across the group's business to business (B2B) portfolio. The base case does not take into account any material disposals.
We could downgrade DMGT in the next 12 months if operating performance declined materially, resulting in sustained weakening in margins and the group being unable to stabilize and increase earnings. This could occur if continued declines in the media divisions' earnings, combined with any other portfolio weakness, resulted in further material declines in EBITDA of existing operations. This could also happen if further portfolio disposals materially shrink the group's operations. We could also downgrade DMGT if the group were to increase leverage such that adjusted debt to EBITDA reaches or exceeds 3.0x.
We currently view an upgrade as remote. An upgrade would require a material increase in scale and a demonstrated sustainable improvement in earnings and margins, including sustained organic earnings growth. This would need to be supported by the group's existing financial policy and an adjusted debt-to-EBITDA ratio maintained well below 3.0x.
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