Most observers believe that the passing of the torch at 21st Century Fox will have little change on the operational philosophy of the company. But Wall Street umpire Moody’s Investors Service isn’t so sure.
No immediate changes are expected.
The question is a little further down the road as Rupert Murdoch’s steady hand on the wheel is replaced by a new management team.
According to Moody’s analyst Neil Begley, Fox is exceptionally well balanced among its peer groups, maintaining very healthy liquidity and utilizing very sound practices when financing acquisitions.
In particular, Begley likes the company’s practice of maintaining a stockpile of cash in the neighborhood of $7.5 billion, far superior to the $1-$3 billion cash reserves generally maintained by its peer group.
Begley said it is Moody’s opinion that Rupert Murdoch’s sound and conservative practices, often executed against the wishes of equity holders, was the result of a near-death experience suffered by the company in the early 1990s.
Begley said, “Notably, the company significantly improved its creditworthiness since its close brush with a financial collapse and its credit rating has moved from deep speculative-grade to a solid investment-grade rating and has never been downgraded since 1991, at which point its rating was B1 versus the current rating of Baa1.”
The question isn’t what happens next, it’s what happens as Rupert Murdoch’s grip continues to relax.
Begley commented, “Moody’s expects that Mr. Murdoch will continue to exert his influence over the company’s actions and his risk-averse posture will continue to provide solid support to FOX’s credit ratings over the near term. However, since it is unclear at this point how James Murdoch and the new management team will steer the company from a financial risk perspective when Mr. Murdoch fully removes his hands from the helm, we believe that there is moderate risk of negative consequences for bondholders, should the company align its practices with many of its lower-rated peers and deviate from prudent practices exhibited over the last two decades.”
The bottom line is that Moody’s will be closely watching for any shift in the company’s financial management practices. Begley concluded, “Moody’s cautions that over the long-run the company’s ratings could come under pressure if management adopts substantially more shareholder friendly policies, abandons its history of superior liquidity, or does not sustain or remain committed to leverage levels expected for the Baa1 rating.”
