Fitch Ratings believes a strike by the Screen Actors Guild of America (SAG) would have limited impact on the credit profile of the media and entertainment sector over the short-term of six to nine months. However, a prolonged strike could impact specific sub-segments of the industry and would be incremental to the negative effect of the weakening advertising market.
Many of the sub-sectors that rely on SAG-related content (broadcast networks and film studios) are housed within highly diversified media conglomerates. This limits much of the immediate impact a strike could have on the overall credit profile of companies within the sector. Specifically, CBS (Issuer Default Rating (IDR) ‘BBB’; Stable Outlook by Fitch), Disney (IDR ‘A’; Stable Outlook), News Corp (IDR ‘BBB’; Stable Outlook), Time Warner (IDR ‘BBB’; Stable Outlook), and Viacom (IDR ‘BBB’; Stable Outlook), along with General Electric (not Rated by Fitch), and Sony (IDR ‘A-‘; Stable Outlook), account for a large portion of these sub-segments through their various business lines. Fitch acknowledges that each of the conglomerates have revenue streams that are not dependent on SAG, especially over the short-term, as well as various alternatives (i.e., reality programming, repeats, live news) to at least partially offset down time from SAG-related programming. In addition, many of these companies have capacity at existing ratings and Outlooks to withstand temporary pressures to operations.
Last year’s Writers Guild of America (WGA) strike had relatively minor impact to the conglomerates cash flows, in part, due to the lag time between writing and production/distribution. A SAG strike would have a more immediate impact than the WGA strike. Leading up to the WGA strike the pipeline of material was deeper because writing is earlier in the content life-cycle and studios were working to stock-pile scripts. In the case of a potential SAG strike, all SAG related production would be halted and the distribution pipeline would be comprised of only product that has completed production. This is important as the studios continue to ramp up production for the fall TV schedule. The impact from the WGA strike was also partially muted due to the networks ability to substantially increase CPM’s in the spot market as inventory was reduced from make-goods. Given the existing macro-economic environment, it is uncertain if the networks would be able to command similar high CPM’s in the spot market if a strike were to take place and then be subsequently resolved.
Unlike the TV studios, Fitch expects that most of the movie studios, however, front-loaded their 2008 production schedule, thereby prolonging the lag time between production and release. Therefore, Fitch expects the movie studios to have a large portion of their 2009 release schedule in the can moving towards post-production activity.
Aside from the conglomerates, pure-play companies in the movie exhibitor business and TV broadcast station business could see pressure over a prolonged strike period as most of these companies do not have diversified revenue streams, are dependent on much of their content from third parties, and typically have weaker capital structures than the conglomerates. Fitch would not, however, expect a material impact from a short-term strike on these pure-play sectors, especially the movie exhibitors.
Following is a more detailed discussion on each of the U.S. conglomerates and smaller sub-segments and the impact from a SAG strike. For the reasons listed above, Fitch does not expect a material impact to the cash flows related to the conglomerates’ movie studios through 2009 and therefore does not repeat that reasoning for each company below.
CBS:
The 35% of revenue CBS generates from outdoor, radio and publishing would predominantly not be impacted by a strike. The remaining 65% of CBS’s revenue is derived from television, however not all of that is susceptible to a SAG strike. Specifically, Fitch would expect limited short-term impact to the company’s O&O station revenue (estimated at approximately 15% of total revenue by Fitch). In addition, carriage fees (8% of revenue) of its Showtime network should be unaffected over the short-term, however a prolonged strike could impact some of the networks continued push at original programming. The company’s syndication license fees (10% of revenue), should also be stable as off-network syndication would continue over the intermediate-term and the first-run syndication market, in which CBS is very strong, should have limited impact as many of the cast members are covered under American Federation of Television and Radio Artists (AFTRA) agreements. A large portion of remaining revenue (estimated at less than 30% of total revenue) comes from the CBS network and studio. While the networks prime-time schedule will be susceptible to a strike, it also benefits from reality programming (Survivor, Amazing Race), morning and evening news, other news shows (60 minutes, 48 Hour Mystery), sports and late-night programming, all of which have limited exposure to SAG (Fitch acknowledges SAG members are frequent guest on late-night shows). Similar to the WGA strike, Fitch would expect CBS’s credit profile to largely remain in-tact during a short-term SAG strike.
Disney:
Fitch does not expect a material impact to Disney as its ABC network/studio comprises a relatively small amount of overall company cash flows (broadcasting accounts for less than 20% of revenue and less than 10% of EBITDA) and continues to roll-out successful reality programming. Importantly, there would be no impact to the significant cash flows generated by the company’s ESPN channels. While Fitch would expect some impact to the programming at the Disney Channel, the carriage fees from such channel would not be impacted during a short-term strike. Fitch would not expect a major impact to Disney’s movie studios (20% of revenue) over the short-term as all 2008 releases are in the can, and Fitch would expect a large portion of 2009 releases to have completed a majority of production. In addition, Disney’s recent roll-out of its animated movie plans (via Pixar and Disney Animation) could continue production to a certain extent. Obviously the company’s Parks & Resorts and Consumer Products segments (over 35% of revenue) would not be exposed to a strike.
News Corp.
Nearly 45% of News Corp.’s revenue is derived from print, interactive, and satellite television, none of which have direct exposure to SAG-related programming. Fitch estimates that a significant portion of the approximately 15% of revenue derived from cable network programming is also not susceptible to a SAG strike as Fitch believe much of this is derived from the company’s Fox News and Fox Sports channels. The company’s television segment comprises 20% of revenue and includes, among other things, the Fox network and 28 O&O stations. Fitch does not expect any impact over the short-term to the company’s O&O stations, and the Fox network has experienced strong growth over the last few years from its American Idol franchise, which is also unaffected by a strike. The company’s movie studios account for approximately 20% of total revenue.
Time Warner
Time Warner’s AOL and Publishing segments combined account for approximately one-third of total revenue and are obviously not impacted by a strike. Another one-third of the company’s revenue comes from its cable networks–CNN, HBO, TNT and TBS among others. The majority of this revenue is in the form of carriage fees and subscriptions which will be resilient during any short-term strike. The cable networks also generate advertising revenue, a large component of which Fitch estimates to come from CNN, live sports, and off-network syndicated programming, none of which are susceptible to a strike. Any shortfalls on audience delivery related to TBS and TNT original programming would not be material to the company’s credit profile. Notwithstanding the weak economic backdrop, Fitch would also expect HBO subscription revenue to remain resilient during a short-term strike. The remaining one-third of revenue comes from the company’s filmed entertainment segment, which includes its TV studio. Unlike the preceding three conglomerates, Time Warner does not have a major broadcast network (it owns 50% of the CW network), however it does supply the four major networks with programming from its Warner Brother studio. Fitch estimates the loss of revenue Time Warner generates from first-run primetime scripted material is not significant from a short-term credit perspective especially since it will coincide with the elimination of production costs. In addition, cash flows through syndication and home entertainment sales (traditionally strong areas for Warner Brothers) would continue during a SAG strike.
Viacom
Unlike the other conglomerates, Viacom has no exposure to primetime broadcast television and as such has very limited exposure to a SAG strike. The vast majority of the company’s cash flows are derived from its media networks division which includes cable channels MTV, VH1, and Comedy Central, all of which generally do not rely on SAG-related programming. While the company’s movie studios comprise a material portion of revenue, they do not contribute materially to cash flows. However, that is not to say that there is a large fixed cost base since Paramount and Dreamworks function as distributor for numerous independent studios (i.e., book gross revenues but only take a distributor fee). Fitch would expect a large portion of 2009 releases to have concluded film production prior to any SAG strike.
Movie Exhibitors:
Similar to the movie studios above, Fitch does not believe the movie exhibitors such as AMC Entertainment (‘B’; Stable Outlook), Regal (‘B+’; Stable Outlook), and Cinemark (NR) will be impacted by a strike over the short-term as they can rely on the lag time from when a movie is finished production and goes through post-production, marketing and release phases which can take up to one year. The exhibitors will also benefit from our expectation that movie studios front-loaded their 2008 production schedules (i.e., 2009 releases). Obviously, a more protracted strike would have substantial impact on these entities as they are solely dependent on the studios product while maintaining a very high fixed cost base and, generally speaking, weaker capital structures.
TV Broadcast Affiliates:
TV broadcast affiliates derive their advertising revenue from three main sources: their original news programming (estimated by Fitch at approximately 40%), local ads on network shows (30%) and local ads on syndicated shows (30%). All things being equal, ads sold during original news programming should not be impacted by a SAG strike. While theoretically local time sold on network shows could be impacted longer term as the networks repeat programming or offer less popular shows during their prime-time schedules, Fitch believes there may be a lag before local advertisers opt out of a television based advertising strategy based on a strike. Fitch believes most of the advertising revenue stream from syndicated shows should be unaffected. Any impact to the local broadcasters from a SAG strike, however, does come at a very inopportune time as the sector struggles with major cyclical issues in the form of auto advertising.
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