Comcast’s $65 billion bid for most Twenty-First Century Fox assets is credit negative

On Wednesday, Comcast Corporation (A3 review for downgrade) offered $65 billion in cash to acquire
most of the assets of Twenty-First Century Fox America Inc.’s (Baa1 review for upgrade) parent, Twenty-First
Century Fox Inc. The offer, consistent with our expectations in May when we placed Comcast on review for
downgrade, is credit negative for Comcast and would leave the company with massive debt.

Buying the Fox assets, the same ones Fox agreed to sell to The Walt Disney Co. (A2 stable) in December, on
top of its planned acquisition of UK pay-TV company Sky Plc (Baa2 developing) would result in total debt of
about $170 billion, including the assumption of $20 billion of outstanding Fox debt and $12.1 billion of debt
at Sky. At that point, the combined Comcast would be the world’s second-most indebted non-financial
company behind only AT&T Inc. (Baa2 stable) following its 14 June purchase of Time Warner Inc.
(Baa2 stable).

Assuming about $40 billion of EBITDA after synergies, pro forma leverage would be about 4.25x, a material
change in financial-risk tolerance for the company and a substantial increase from leverage of less than 2.5x.
Assuming an EBITDA growth rate of 4% per year and including expected cost reductions and synergies, the
consolidated Comcast-Fox-Sky would still need to reduce indebtedness by around $45 billion to return to
2.75x leverage. Furthermore, in our opinion, as time passes, avoiding share repurchases and additional cashfinanced
acquisitions for more than three years will prove challenging for the consolidated company.

Nonetheless, the combined businesses would generate considerable free cash flow that we estimate will
begin at $10-$11 billion after dividends and would be sufficient to repay debt as it matures, resulting in
minimal capital market risk after closing. The ability to repay debt as it comes due is important given the
amount of outstanding debt, secular pressure on linear pay-TV and slowing growth for the cable industry.

Given our expectation for free cash flow, achieving leverage targets consistent with an A3 rating in fewer
than three years would be challenging without also using proceeds from asset sales or a dividend cut, even if
cash flow is not committed to further acquisitions, share repurchases or other spending. In addition,
following these transactions, ensuring Comcast’s media businesses are more competitive with the rapid
growth in subscription on-demand consumption and services like Netflix, Inc. (Ba3 stable) will require
significantly increased spending on content, streaming technology and marketing, which could pressure free
cash flows.