Fitch: Discovery's Ratings Unaffected by Purchase of Remaining Eurosport Interest

NEW YORK--(BUSINESS WIRE)-- Discovery Communications LLC's (Discovery) 'BBB' Issuer Default Rating (IDR) is not affected by the company's agreement to exercise the put option on TF1 Group's (TF1) 49% ownership stake in Eurosport for 491 million Euros, according to Fitch Ratings. As a result of this transaction, Discovery will own 100% of Eurosport.

Fitch expects Discovery to fund this transaction in a manner consistent with the company's 3x total leverage target and does not expect any material changes to the company's existing policy. Discovery's total leverage has steadily increased over the past four years reaching 2.91x at latest 12 months (LTM) March 31, 2015, near the limits of Fitch's rating. However, Fitch takes comfort from the company's clearly stated total leverage target of 3x and desire to remain investment grade along with its willingness to use free cash flow (FCF) as the primary method of returning value to shareholders.

Fitch believes the company has sufficient existing liquidity given cash balances of $321 million as of March 31, 2015 and $1.2 billion in aggregate availability under its $1.5 billion revolver and $1 billion commercial paper program. In addition, the company generated $1.2 billion of FCF in fiscal year (FY) 2014, and Fitch believes the company's high operating margins and the low capital intensity associated with the cable programming business positions Discovery to generate annual FCF of approximately $1 billion to $1.3 billion.

The put option was included as part of Discovery's 2012 agreement with TF1 when Discovery began its investment in Eurosport with a 20% stake. In 2014, Discovery increased its stake to 51%. As part of today's agreement, TF1 will buy back Discovery's 20% interest in TV Breizh, Histoire, and Ushuaia TV for EUR15 million. Both transactions are expected to close at the beginning of the fourth quarter of 2015.

This transaction is in line with Fitch's expectations that TF1 would exercise the put option. Fitch believes the acquisition is positive. It is also in line with Discovery's recent purchase of certain exclusive TV and multi-platform broadcast rights for the four Olympics from 2018 through 2024 for 1.3 billion Euros.

In terms of future capital allocation, Discovery's priority remains investing in its core business through programming existing networks or through acquisitions. While large-scale M&A activity is not anticipated given the dearth of cable network assets available for sale, there is room at the 'BBB' level to absorb some mid-sized acquisitions if Fitch believed the company could credibly restore leverage to under 3x within a 12-month timeframe.

Discovery's ratings are supported by its strong core brands - in particular the strength of the company's Discovery and TLC brands, both of which reach nearly 100 million subscribers across the U.S. and continue to generate solid ratings. In addition, the ratings incorporate the revenue and growth prospects of Discovery's international business segment, global carriage, leverageable content, robust FCF and solid credit metrics. Ratings concerns continue to center on the significant contribution of cyclical advertising revenue, a competitive landscape of similar programming on other cable channels, the general volatility associated with hit-driven content and the company's dependence on the Discovery and TLC brands.

Fitch currently rates Discovery as follows:

--Long-term IDR 'BBB';

--Short-term IDR 'F2';

--Senior unsecured revolving credit facility 'BBB';

--Senior unsecured notes 'BBB'

--Commercial paper 'F2.'

Additional information is available on www.fitchratings.com

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150722006468/en/

Fitch Ratings
Jack Kranefuss
Senior Director
+1-212-908-0791
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Rachael Shanker
Associate Director
+1-212-908-0649
or
Media Relations
Alyssa Castelli, New York,+1-212-908-0540
[email protected]

Source: Fitch Ratings

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