June 20, 2018 / 6:00 PM / a month ago

Banks to fatten wallets as Disney, Comcast compete for Fox

NEW YORK, June 20 (LPC) - Banks arranging nearly US$36bn of loans to support Walt Disney Co’s sweetened US$71.3bn bid to buy Twenty-First Century Fox Inc’s media assets stand to pocket around US$200m in fees, boosting profits from an increasingly hot market for mergers and acquisitions (M&A).

Lenders have already raked in record fees from M&A deals this year, according to Freeman Consulting Services, and the pace could stay torrid after a federal judge’s seal of approval on June 12 for AT&T Inc’s long-pursued purchase of Time Warner.

The decision, long after the deal was first announced in October 2016, raised optimism that more such tie-ups would be cleared by regulators, opening opportunities for banks eager to provide the needed financing.

“The bidding war and transformational nature of the Fox deal suggests that the US M&A market could continue hitting new records,” said Jeff Nassof, a director at Freeman Consulting. “Landmark deals like Fox tend to spur a wave of copycat deals from competitors in the industry.”

Disney on Wednesday said it expects to pay about US$35.7bn in cash toward the cash-and-stock takeover, and has secured financing commitments from lenders for the full cash portion.

The estimated US$200m fee income to banks would be earned by extending the initial loans as well as from replacing the loans with permanent bond debt.

Disney enhanced its offer after the media conglomerate’s initial bid last December to buy the Fox film, television and international businesses for about US$52bn in an all-stock deal was last week countered with a US$65bn all-cash bid from Comcast Corp.

If Comcast’s proposal is victorious, lending banks would earn about US$300m for arranging the larger amount of debt financing, Freeman estimates.

Even before either the Disney or Comcast financings for Fox are tallied, banks have earned US$8.9bn from US M&A deals so far this year, according to Freeman, based on Thomson Reuters data. That tops US$8.8bn in the same period last year, for a new all-time high.

PLANNING PAYDOWN

Disney’s US$38 per share offer would be evenly split between cash and stock. The company said it would assume about US$13.8bn of net Twenty-First Century Fox debt, bringing the total transaction value to US$85.1bn.

“We’ve always said we would be willing to deploy our balance sheet to advance our strategic objectives. This is one of those opportunities,” Christine McCarthy, Disney’s chief financial officer, said on an investor call. “We have the opportunity to use debt to fund 50% of the consideration, which allows our shareholders to retain more of the upside from the transaction.”

Last December, sources said Goldman provided an up to US$9bn bridge loan to support Disney’s purchase of Fox assets at the lower acquisition offer.

The funds were to be used to pay an estimated US$8.5bn cash dividend to Fox to compensate for tax liabilities, according to the sources.

Goldman declined on Wednesday to comment on Disney’s news of financing commitments for the cash component of its acquisition offer.

Disney said it does not expect to complete a 20 billion share repurchase that it announced in December, and that it will focus on deleveraging after the acquisition.

If Twenty-First Century Fox completes its purchase of the share of Sky that it doesn’t already own before the close of the Disney deal, Disney would assume full ownership of Sky along with its outstanding debt at closing.

“Assuming Twenty-First Century Fox completes the Sky deal, prior to the close of our transaction, we expect pro forma leverage to be about 4.0 times total debt to Ebitda, and about 3.4 times if the Fox Sky deal is not completed,” McCarthy said.

“Given the strong cash flow profile of the combined company and our commitment to a strong balance sheet and commensurate credit ratings, we expect to reduce leverage by at least half a turn per year and to return to leverage levels consistent with a single-A credit rating by the end of fiscal 2021 assuming 39% ownership of Sky and by the end of fiscal 2022 assuming 100% ownership,” she said.

Disney is currently rated A+ by S&P and A2 by Moody’s Investors Service. (Reporting by Lynn Adler Editing by Michelle Sierra and Jon Methven)

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