AMC Networks (AMCX) Purchase of BBC Stake Will Not Affect Corp. Rating - Moody's

Moody's Investors Service said that AMC Networks' (Nasdaq: AMCX) ("AMC") announcement to acquire a 49.9% ownership interest in BBC America, will not impact its Ba3 Corporate Family rating, Ba3-PD Probability of Default rating, SGL-2 Speculative Grade Liquidity rating or the positive outlook. BBC America is a cable television network and is a wholly owned subsidiary of The British Broadcasting Corporation (BBC), a U.K. based public service broadcaster.

AMC will pay $200 million for the transaction and will fund it with cash on hand, which stood at $284 million at 06/30/2014. Since the company is using cash on its balance sheet to execute the deal and BBC America will be neutral to mildly positive to leverage, we anticipate debt-to-EBITDA leverage won't materially change from its pre-acquisition level. Even though BBC will continue to hold a majority stake in the joint venture, AMC will have significant influence over the financial and operating policies of BBC America, including affiliate and advertising sales, and accordingly will consolidate the joint venture's financial statements. BBC America will be operated as a separate channel within AMC's portfolio of channels, which include AMC, IFC, WE tv, and SundanceTV. BBC America and AMC have worked together in the past and produced a series of hit original shows, including drama Top of the Lake and The Honourable Woman and the upcoming One Child. A partnership of the two cable networks will allow them to leverage their content catalog as well as their distribution and advertising platforms. The deal will also strengthen bargaining power in their carriage fee negotiations with cable and satellite operators amidst a wave of consolidation in the MVPD marketplace.

Pro forma leverage of 4.8x as of 06/30/2014 (incorporating Moody's standard adjustments and pro forma for Chellomedia's acquisition) is within our stated expectation that leverage will be maintained below 5.75x but is above the 3.5x trigger required for an upgrade. As the company will use a significant portion of cash on hand to fund the acquisition, we believe that debt reduction will take longer than previously envisaged but the company will continue to delever through growth in EBITDA. However, at this point, we are not taking any actions with regards to AMC's ratings or outlook as we believe that management is committed to a higher rating and will use free cash flow to reduce borrowings under the company's revolving credit facility, such that leverage will decline to the 3.5x range within the next 12 to 24 months. Further, we expect that AMC will continue to deliver strong operating performance and grow its EBITDA, both through organic operations and tuck-in acquisitions. We believe that AMC will continue to be prudent in its capital allocation, using excess cash to reduce debt and support long-term revenue growth and diversification of its business through strategic investments such as the BBC America transaction.

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