According to the news report by MarketWatch, S&P Global Ratings reduced Disney’s rating from A+ to A on Tuesday. The firm explained this move, stating that the entertainment giant was facing operational risks from its future acquisition of 21st Century Fox Inc.’s entertainment divisions.
The agency further clarified that its forecast indicates that in the next two years, Disney could bring its leverage down to 2x, which is the lower threshold for an A+ credit rating. However, S&P Global believes that the entertainment giant could be facing internal as well as external challenges that could lead to a delay in the process of clearing its debt, because of which the adjusted leverage could remain above the 2x level.
The good news is that the agency still expects Disney to make the required changes after its acquisition of Fox’s entertainment divisions without cross the 2.5x leverage levels.
This deal includes the purchase of 20th Century Fox Studio, parts of Fox’s cable networks in the US, and some of the company’s major direct-to-consumer platforms. The deal for the D2C platforms also includes a 30% stake in Hulu, the streaming service and STAR India.
For the deal to go through, Disney and Fox need to get regulatory approval from all the countries in which the companies have a presence. The US Justice Department has demanded that Fox sell of its regional sports network to avoid a monopoly as a condition to giving its approval for the deal.
According to CNN, despite this downgrade, the two companies announced on Tuesday morning that Disney’s $71 billion acquisition of Fox’s assets would take effect from March 20.
The parts of 21st Century Fox not sold off in this deal will be spun off as a new company which will be called Fox. This new company will consist of Fox’s broadcast network, Fox Sports and Fox News.
The new combined Fox-Disney structure has been outlined by senior executives at the company, however, staffers at 20th Century Fox Studio are preparing for layoffs as well as other major changes.
After the announcement was made, the two companies also detailed the steps that are still remaining to be taken before the final closure of the deal. The details of those steps have been announced in 21st Century Fox’s news page.
There is still a certain amount of uncertainty about the cutbacks that will follow the closure of this deal, which, according to one senior executive, is inevitable.
Market analysts are expecting Disney to lay off around 5,000 workers, both from its own side as well as Fox’s side. This will be as a direct result of the merging of the two companies.
While the entertainment giant has not shared specific plans on the consolidation, investors have been told that there would be at least a $2 billion impact on cost synergies by the year 2021 because of operating efficiencies that will need to be realized from the merging of the two companies.
Fortune reported that a part of the delay in the closure of the deal was due to waiting for the final approval from Mexican regulators. Disney had originally bid $52.4 billion for the acquisition of most of Fox’s assets, however, a counter offer from Comcast forced the entertainment giant to raise its bid to $71.3 billion.
The companies’ shareholders gave their approval for the acquisition in July of 2018, however, regulatory approvals were required from all the countries where these companies had a presence. The final approvals finally came through from Mexico’s regulators after the two companies agreed to sell Fox’s sports holdings in the country.