Daily Mail & General Trust Downgraded To 'BB-' Following Group Reorganization; Outlook Stable
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Research Update:
Daily Mail & General Trust Downgraded To 'BB-'
Following Group Reorganization; Outlook Stable
December 21, 2021
Rating Action Overview
PRIMARY CREDIT ANALYST
- On Dec. 16, 2021, Rothermere Continuation Ltd. (RCL), the controlling shareholder of Alex Roig, CFA
U.K.-based media group Daily Mail & General Trust PLC (DMGT), announced that its offer to London
acquire the shares in DMGT that it didn't own has become unconditional and the acceptance + 44 20 7176 8599
condition (above 50%) has been satisfied. RCL will therefore proceed to take the group private. Alex.Roig
@spglobal.com
- The transaction followed the disposal of DMGT's insurance risk segment RMS in September
SECONDARY CONTACT
2021 for a cash consideration of £1,425 million. In our view, this has significantly reduced
Alexandra Balod
DMGT's scale, scope, and diversification of operations and increased its dependence on the
London
structurally challenged consumer media segment.
+ 44 20 7176 3891
- At the same time, we expect DMGT's financial policy and capital structure will remain alexandra.balod
@spglobal.com
unchanged following the privatization and disposal of RMS.
- We are lowering our ratings on DMGT and its senior unsecured debt to 'BB-' from 'BB' and
removing them from CreditWatch with negative implications. The outlook is stable.
- The stable outlook reflects our view that over the next 12 months DMGT's consumer media and
events operations will recover, and the group will maintain adjusted leverage of around 2.5x
while generating free operating cash flow (FOCF) of around £50 million.
Rating Action Rationale
The downgrade reflects our view of DMGT's weaker business following the disposal of RMS.
On Sept. 15, 2021, DMGT announced it had completed the sale of its insurance risk management
business RMS to Moody's Corp. for a cash consideration of £1,425 million. In our view, this
disposal reduced the scale, scope, and diversity of DMGT's operations. In the financial year (FY)
2021 ended Sept. 30, 2021, RMS represented 20% of the group's revenues and 37% of
company-adjusted profit. It also benefited from stable and predictable organic revenue growth
and had higher profitability compared with other business divisions, with company-adjusted
operating margin of 18% compared with around 13% for the group overall. Following the disposal,
DMGT will have higher exposure to the structurally challenged consumer media business division
www.spglobal.com/ratingsdirect December 21, 2021 1Research Update: Daily Mail & General Trust Downgraded To 'BB-' Following Group Reorganization; Outlook Stable that will account for more than 70% of revenue. This will translate into lower growth prospects and weaker profitability for the group. As a result, we believe DMGT will be positioned weaker than its larger and better diversified peers in the media industry. We assume DMGT's financial policy and capital structure will not change following the privatization. On Dec. 16, 2021, RCL's offer to acquire all non-voting A shares in DMGT that it did not already own become unconditional. RCL has received acceptance for 50.73% of all shares in DMGT, increasing its ownership of all shares in the group to 84.6% from 34%. The offer will remain open for acceptance until Jan. 6, 2022, hence RCL's ownership of DMGT could further increase. As previously announced, as part of the transaction DMGT will distribute special dividends to its shareholders, including £1.3 billion in cash proceeds from the sale of RMS and its 24% equity stake in the publicly listed Cazoo, and will make a £412 million payment to the pension trustees. RCL will also pay participating minority shareholders 270p per share in cash. Following the transaction, DMGT will delist from the London Stock Exchange and continue operating as a private company. We understand that after the privatization RCL intends to continue operating DMGT with the same capital structure and financial policy as historically, with net leverage of up to 2.0x on a company-adjusted basis, which translates into around 2.5x on an S&P Global Ratings-adjusted basis. DMGT's outstanding £200 million unsecured bonds due in 2027 will remain in place, and there won't be any new debt issued as part of the transaction. We understand that DMGT will continue to be RCL's main asset, and that there are no material financial liabilities at RCL. Therefore, in our view, DMGT's credit quality is not constrained by that of RCL. We also assume that in FY2022-2023 DMGT will reduce its dividend payout to £20 million-£40 million per year, compared with about £55 million in FY2020-2021. Our rating on DMGT and our assessment of the group's management and governance already incorporated the 100% voting control that the Rothermere family had in DMGT prior to the transaction, which in our view could lead to corporate decision-making that prioritizes the interests of the controlling owners over those of other stakeholders. DMGT will be exposed to volatility in earnings, input cost inflation, and the lower profitability of the consumer media segment. We expect revenue in the consumer media segment will recover to pre-pandemic levels in FY2022, and will remain stable or grow only slowly thereafter. This will reflect growth in MailOnline and other digital revenue that will be offset by continued challenges and reducing circulation of the print titles such as the Daily Mail, The Mail on Sunday, and the Metro. We also think that inflation in input costs, especially in print, will constrain operating margins, and expect that adjusted operating margin in consumer media will remain below 10% in FY2022-2023. In the business-to-business (B2B) segment, following the sale of RMS and education technology business Hobsons in FY2021, DMGT retains property information businesses Landmark and Trepp, and events and exhibitions (dmg events). We expect revenue in the property businesses will reduce by 10%-15% in FY2022 compared with FY2021, which benefited from government support and very high activity in the property markets. In events, we expect revenue and earnings to strongly recover as show attendance improves, but to remain significantly below pre-pandemic levels at least until the end of FY2023. As a result, we anticipate the group's adjusted EBITDA margin to remain below average compared with peers in the media industry and to weaken to 11%-13% from around 16% in FY2019, prior to the impact of the pandemic and disposal of higher-margin B2B assets. Combined with a historically stable working capital profile and limited capital expenditure (capex) requirements, this will translate into FOCF of £50 million-£70 million annually, down from about £140 million in FY2019. www.spglobal.com/ratingsdirect December 21, 2021 2
Research Update: Daily Mail & General Trust Downgraded To 'BB-' Following Group Reorganization; Outlook Stable We estimate DMGT will maintain adjusted leverage in the 2.2x-2.5x range in FY2022-2023. Excluding discontinued operations, DMGT's adjusted debt to EBITDA increased to about 2.5x in FY2021 from 2.3x in FY2020. We estimate that in FY2022 leverage will remain at about 2.5x and then improve toward 2.2x in FY2023. Our adjusted debt calculation for DMGT includes gross debt of £200 million, £37 million financial leases, and other minor adjustments. We do not net the cash that the group has on balance, which we assume is available for the special dividend distribution and pension funding following RCL's acquisition, a combination of working capital and operational needs, and bolt-on acquisitions over time. Following the sale of RMS, the group's lease liabilities have significantly reduced, which has partly offset the effect of lower adjusted EBITDA on adjusted credit metrics. In our base case, we assume the group's portfolio will remain largely unchanged, and we do not incorporate any debt-financed acquisitions or further asset disposals. Outlook The stable outlook reflects our view that over the next 12 months DMGT's consumer media and events operations will recover, and the group will maintain adjusted leverage around 2.5x, while generating FOCF of around £50 million. The outlook also assumes that the group will manage dividend payments and acquisitions such that its adjusted leverage won't materially increase beyond our base case. Downside scenario We could lower our rating on DMGT if the group's adjusted debt to EBITDA exceeded 3.5x. This could occur if: - The group's adjusted EBITDA declined more substantially than we forecast--for example, if operating performance recovered more slowly, or if there was a steep decline in consumer media earnings; or - The group followed a more aggressive financial policy than we assume under our current base-case-–for example, if it pursued higher dividend payments or debt-funded acquisitions that led to higher leverage. Upside scenario We view an upgrade as remote. It would require a material increase in the group's scale and scope of operations, sustainable organic earnings growth, and a significant improvement in earnings and margins. This would need to be supported by the group's commitment and demonstrated track record of a conservative financial policy that would support stronger credit metrics compared with our base case. Company Description DMGT is a U.K-based media group operating consumer media and B2B divisions. The majority of DMGT's revenues come from the consumer media segment (about 70% of revenues in FY2021), which includes the Daily Mail, The Mail on Sunday, the Metro, the i newspaper, MailOnline, and New Scientist. The B2B segment includes property information (Landmark and Trepp brands, www.spglobal.com/ratingsdirect December 21, 2021 3
Research Update: Daily Mail & General Trust Downgraded To 'BB-' Following Group Reorganization; Outlook Stable
representing 25% of revenues in FY2021), and global B2B events and exhibitions, with a particular
focus on the energy, construction, and hotel and hospitality sectors.
Following the take-private transaction, RCL, a Jersey-registered holding company controlled by a
trust for the benefit of Viscount Rothermere and his family, will continue to have full voting control
in DMGT and will own 85% or more of all shares in the company (depending on the final
acceptance of its offer to acquire all shares in DMGT that it did not already own). Following the
transaction, DMGT will delist from the London Stock Exchange and continue operating as a private
company.
Our Base-Case Scenario
Assumptions
- DMGT's revenue to expand by 4.0%-5.0% in FY2022-2023, predominantly driven by recovery in
the consumer media segment and events and exhibitions, and despite a temporary drop in the
U.K. property information revenue that we forecast in FY2022. From FY2023, we expect the
property information segment will return to about 5% growth annually, but newsprint revenue
will be flat or reduce modestly, reflecting structural challenges affecting the industry and lower
circulation. In events, we expect strong recovery, but revenue to remain below pre-pandemic
levels until FY2024.
- Adjusted EBITDA to stand largely flat in FY2022 versus FY2021 at around £100 million-£110
million due to weak profitability on the consumer media segment, which now represents over
50% of the group's earnings, partly offset by a small reduction in corporate and exceptional
costs.
- Pension funding of around £412 million following the privatization to be partly funded by
around £130 million cash in DMGT's pension escrow. We don't assume further pension funding
once DMGT becomes a private company.
- Dividend payout of £1,310 million-£1,350 million in FY2022, including the special dividend
following the sale of RMS, as well as FY2021 dividends of around £40 million and modest
interim dividends. Going forward, we assume DMGT will revise its dividend policy and reduce
dividend payouts to £20 million-£40 million per year.
- Under our base case, we assume the group will continue making bolt-on acquisitions of £30
million-£50 million per year and will fund them primarily with its positive discretionary cash
flow.
Key metrics
--Fiscal year ended Sept. 30--
(Mil. £) 2019a 2020a 2021a 2022f 2023f 2024f
Revenue 1,411 1,211 885 900-950 950-1,000 950-1,000
EBITDA 226 151 107 100-120 ~120 ~120
EBITDA margin (%) 16 12.4 12.1 10-12 ~12 ~12
Capital expenditure (16) (14) (10) (15-20) (15-20) (15-20)
Free operating cash flow (FOCF) 139 119 74 50-70 50-70 50-70
www.spglobal.com/ratingsdirect December 21, 2021 4Research Update: Daily Mail & General Trust Downgraded To 'BB-' Following Group Reorganization; Outlook Stable
--Fiscal year ended Sept. 30--
(Mil. £) 2019a 2020a 2021a 2022f 2023f 2024f
Dividends (275) (55) (55) (1,310)-(1,350) (20-40) (20-40)
Debt to EBITDA (x) 1.4 2.3 2.5 2.3-2.5 2.3-2.5 2.3-2.5
FOCF to debt (%) 42.8 35.1 27.8 20-25 25-30 25-30
*All figures are S&P Global Ratings-adjusted. a--Actual. f--Forecast. FOCF--free operating cash flow.
Liquidity
Our short-term rating on DMGT is 'B'. We assess the group's liquidity as adequate, reflecting our
view that sources of liquidity will exceed uses by more than 3x in the 12 months following the
closing of the take-private transaction. Liquidity is supported by the group's cash balance, access
to an undrawn revolving credit facility (RCF), and only limited working capital and capex needs.
That said, our liquidity assessment is constrained by our view that due to its relatively small scale
of operations, DMGT would not be able to withstand low-probability, high-impact events without
refinancing.
We estimate that DMGT's principal liquidity sources over the 12 months pro forma the
take-private transaction will include:
- Cash balance of about £50 million following the payment of the special dividend and pension
contributions;
- Full availability under its committed credit lines of approximately £316 million maturing in
March 2023; and
- Unadjusted FFO of about £70 million.
We estimate that DMGT's principal liquidity uses over the same period will include:
- A maximum working capital outflow of about £45 million, including seasonal needs;
- Capex of about £20 million; and
- Dividends of £20 million-£40 million.
Covenants
DMGT's bank facilities contain two financial maintenance covenants: a net debt-to-EBITDA
leverage covenant of 3.5x and an interest coverage covenant of 3.0x, both tested on a semiannual
basis. In FY2021, the group had a net cash to EBITDA ratio of 1.4x on this basis. We forecast
greater than 30% headroom under these covenants in the next 12 months.
Issue Ratings - Recovery Analysis
Key analytical factors
- Our rating is 'BB-' on the £200 million senior unsecured bonds due 2027.
www.spglobal.com/ratingsdirect December 21, 2021 5Research Update: Daily Mail & General Trust Downgraded To 'BB-' Following Group Reorganization; Outlook Stable - The recovery rating is '3', reflecting our expectation of meaningful recovery (50%-70%; rounded estimate: 65%) in the event of a payment default. In line with our criteria, the recovery rating on unsecured debt rated in the 'BB' category is capped at '3'. - We value DMGT as a going concern. Simulated default assumptions - Year of default: 2025 - Jurisdiction: U.K. - Our hypothetical default scenario assumes higher competition and further rapid declines in print circulation and advertising revenue. Simplified waterfall - EBITDA at emergence: £62 million (minimum capex at 1.5% of annual revenue, standard cyclicality adjustment for the media industry at 5%, and a 5% operational adjustment) - Implied enterprise value multiple: 5.5x - Gross enterprise value at default: £341 million - Net enterprise value after administrative costs (5%): £324 million - Estimated senior unsecured debt*: £489 million - Recovery rating: '3' (50%-70%; rounded estimate: 65%) Note: All debt amounts include six months' prepetition interest. *Includes RCF assumed to be drawn at 85%. Ratings Score Snapshot Issuer Credit Rating: BB-/Stable/B Business risk: Weak - Country risk: Low - Industry risk: Intermediate - Competitive position: Weak Financial risk: Intermediate - Cash flow/Leverage: Intermediate Anchor: bb Modifiers - Diversification/Portfolio effect: Neutral (no impact) - Capital structure: Neutral (no impact) www.spglobal.com/ratingsdirect December 21, 2021 6
Research Update: Daily Mail & General Trust Downgraded To 'BB-' Following Group Reorganization; Outlook Stable
- Liquidity: Adequate (no impact)
- Financial policy: Neutral (no impact)
- Management and governance: Fair (no impact)
- Comparable ratings analysis: Negative (-1 notch)
ESG Credit Indicators: E-2 S-2 G-3
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10,
2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate
Issuers, Dec. 7, 2016
- Criteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Dec. 16, 2014
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate
Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- ESG Credit Indicator Report Card: Media And Entertainment, Dec. 7, 2021
Ratings List
Downgraded; CreditWatch/Outlook Action;
To From
Daily Mail & General Trust PLC
Issuer Credit Rating BB-/Stable/B BB/Watch Neg/B
Senior Unsecured BB- BB /Watch Neg
Recovery Rating 3(65%) 3(65%)
www.spglobal.com/ratingsdirect December 21, 2021 7Research Update: Daily Mail & General Trust Downgraded To 'BB-' Following Group Reorganization; Outlook Stable Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. www.spglobal.com/ratingsdirect December 21, 2021 8
Research Update: Daily Mail & General Trust Downgraded To 'BB-' Following Group Reorganization; Outlook Stable
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