S&P Puts News Corp On CreditWatch Negative; Will News Corp Buy McGraw Hill Next?

Tyler Durden's picture

S&P, bored with taking the axe to various insolvent European governments, just went after the man, the myth himself. Next steps: News Corp. expands it media empire by purchasing McGraw Hill (soon to be followed by a tack on acqusition of former-Buffett darling MCO)?

News Corp. Ratings Placed On CreditWatch Negative On Rising Risks Associated With Phone-Hacking And Related Allegations

Overview

  • We see increased business and reputation risks associated with broadening legal inquiries in the U.K.
  • In addition, the FBI is looking into certain allegations pertaining to the phone-hacking scandal
  • We are putting all ratings on News Corp. on CreditWatch with negative implications

Rating Action

On July 18, 2011, Standard & Poor's Rating Services placed all ratings, including its 'BBB+' corporate credit rating, on New York-based News Corp. on CreditWatch with negative implications.

Rationale

The CreditWatch action reflects, in our opinion, the increased business and reputation risks associated with broadening legal inquiries. Since our last research update on July 13, the U.K. legal process has expanded and pressure from U.S. lawmakers has increased for an FBI probe. In an interview with Bloomberg Businessweek in reference to phone-hacking allegations at "News of The World," an FBI official for the agency's New York office said, "We're aware of certain allegations pertaining to possible phone hacking by News Corp. personnel and we're looking into those charges." In our opinion this and other recent developments materially increase the reputational, management, litigation, and other risks currently faced by News Corp. and its subsidiaries. The last several days have been marked by the resignations of the chief executives of News International and Dow Jones, the issuing of summonses to key company executives to appear before Parliament on July 19, the arrest of a former senior company official, and a weakening of the company's executive bench strength.

We see the risk that, if evidence arises sufficient to bring a criminal charge against the company or any current or former employee of the company, then prosecuting authorities in the U.S. could proceed with those charges. As indicated in our July 13 research update, any criminal conviction can materially affect the reputation of the company, which may be more substantial than any financial penalties. We acknowledge the company's broad business and financial strengths--it has significant capacity to cover most scenarios of financial penalties, based on an array of precedents. More important in our analysis are the risks to the ongoing business in the event of additional criminal inquiries and in particular the criminal prosecution of key individuals, the corporation, or its subsidiaries. Business risks include loss of reputation that alienates current and potential clients; forfeit of important business opportunities (such as closure of a profitable publishing business and abandoning of the company's attempt to take full ownership of the U.K.'s largest pay TV operation); and management distraction. Financial risks that go beyond the magnitude of likely penalties include the possibility of a far more severe drop in the company's stock price that could make stock issuance less appealing, and the same scenario for debt market access. We believe a further dramatic drop in the share price could prompt management to consider additional share repurchases beyond the recently announced $5 billion share repurchase authorization.

CreditWatch

Resolution of the CreditWatch listing could take longer than the 90 day typical period of review and analysis, but could involve, in a downside scenario, an interim rating action while on CreditWatch.