Standard & Poor's on Monday said it may cut its debt rating on the Walt Disney Co, citing concerns that its acquisition of Marvel Entertainment for $4 billion will leave it with higher debt.
Disney on Monday agreed to buy Marvel in its largest acquisition since the $7.6 billion purchase of Pixar in 2006. The purchase will be funded with a mixture of cash and stock.
In our view, Disney may to need to issue debt to supplement its cash for this transaction, S&P said in a statement.
The rating agency said it is concerned that Disney's leverage will remain high for an extended period because of the potential issuance to buy Marvel, the company's plan to buy back the stock portion of the deal within one year, and the potential for declines in earnings before interest, taxes, depreciation and amortization.
S&P's long-term corporate credit rating on Disney is now A, the sixth-highest investment grade.
Disney's Ebitda has already been declining at most of its businesses because of the recession's impact on ad revenue, theme park attendance and retail sales, S&P said.
The company has recently reduced its balance sheet debt from a peak recorded at the end of calendar 2008, but we are concerned that the Marvel acquisition will increase Disney's debt without concomitant growth in Ebitda, S&P said.
Earlier on Monday, Moody's Investors Service affirmed Disney's rating, saying that although the acquisition will increase leverage, strong free cash flow will allow Disney to reduce debt again within two years. Moody's rates Disney's senior unsecured debt A2, its sixth-highest rating.
Fitch affirmed Disney's A rating, citing strong free cash flow.
(Reporting by Dena Aubin)