Discovery to de-lever quickly, to be below 3.5x levered in two years

By Devika Patel

Knoxville, Tenn., Sept. 8 – Discovery Communications plans to de-lever its balance sheet rapidly and drop its gross debt to AOIBDA below 3.5x from an expected 4.8x within two years of its upcoming acquisition of Scripps Networks Interactive, Inc.

The company put its acquisition financing with Goldman Sachs & Co. in place on Friday and management is “happy” with the demand for the deal.

“We just got our financing up and loaded, just priced the final sterling issuance this morning,” chief financial officer Gunnar Wiedenfels said at the Bank of America Merrill Lynch 2017 Media, Communications and Entertainment Conference in Beverly Hills, Calif. on Friday.

“We’re very happy with the demand that we have seen, so from the financing side we’re ready,” Wiedenfels said.

The pro forma company will be levered at about 4.8x gross debt to AOIBDA at close. The company plans to de-lever below 3.5x within two years.

“One of the first things that I did when I came in was challenge and test that leverage target range in multiple scenarios and the fact of the matter is this company as a standalone, but even more so the combined company with Scripps, just generates so much cash flow that I’m absolutely comfortable with that leverage,” Wiedenfels said.

Management is focused on keeping Discovery’s investment-grade rating.

“We clearly do want to maintain investment-grade [ratings] that’s why we have defined this 3x to 3.5x ratio,” Wiedenfels said.

“It’s going to take two years or less to get down to that level,” he said.

Wiedenfels noted that the financing structure was arranged to allow prepayment of some short-term debt, with the remaining debt having an 11.5-year average maturity, enabling the company to pay down the debt load quickly.

“We’ve structured the financing in a way that we have some short-term pre-payable debt which allows us to de-lever and we’ve structured the rest in a way where I think we’re looking at an 11.5 [year] average maturity for the debt structure so that we don’t create any relevant refinancing events moving forward.

“I think that’s a very healthy financing structure,” he said.

The company intends to focus on paying down debt over the next two years.

“For the next two years, we’re really 100% focused on de-levering,” he said.

On July 31, Discovery announced that it will acquire Scripps in a cash-and-stock transaction valued at $14.6 billion, or $90 per share.

The cash portion of the purchase price will be financed with a combination of new debt and cash on hand, with the new debt financing fully committed with Goldman Sachs & Co.

Discovery said it expects to maintain investment-grade ratings throughout this transaction and as part of its commitment to de-lever its balance sheet, the company intends to suspend its share repurchase program until its credit metrics are in line with its rating.

The Scripps transaction is expected to close by early 2018.

As previously reported, on Sept. 7, Discovery said Discovery Communications, LLC had priced a $6.3 billion sale of senior notes in six parts.

The company priced $400 million of two-year floaters at Libor plus 71 basis points. These notes priced at par.

A $500 million tranche of 2.2% two-year fixed-rate notes was priced with a spread of 95 basis points over Treasuries. The notes sold at 99.961 to yield 2.22%.

Discovery Communications priced $1.2 billion of 2.95% notes due March 20, 2023 at a Treasuries plus 135 bps spread. The notes sold at 99.874 to yield 2.975%.

The company sold $1.7 billion of 3.95% notes due March 20, 2028 with a 195 bps over Treasuries spread. The tranche priced at 99.643 to yield 3.992%.

In the 20-year tranche, the company sold $1.25 billion of 5% notes at a spread of 235 bps over Treasuries. The notes were priced at 99.9 to yield 5.008%.

The final $1.25 billion tranche of 5.2% 30-year notes priced with a spread of 255 bps over Treasuries. This portion was sold at 99.879 to yield 5.208%.

Goldman Sachs & Co., Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC were the bookrunners for all tranches of notes. Barclays and BofA Merrill Lynch were also bookrunners for the 2019 floaters and two-year notes. BofA Merrill Lynch and Mizuho Securities USA Inc. were also bookrunners for the 5.5-year notes. Barclays and Mizuho Securities USA Inc. were also bookrunners for the 10.5-year notes. BNP Paribas Securities Corp. and RBC Capital Markets Corp. were also bookrunners for the 20-year and 30-year notes.

Discovery Communications, a global media company based in Silver Spring, Md., plans to use the proceeds from the deal for the merger. If the merger is not completed by Aug. 30, 2018, the company will be required to redeem the 2023 notes, the 2028 notes, the 2037 notes and the 2047 notes. Proceeds from the other notes will be used for general corporate purposes, which may include the repayment of the company’s senior fixed-rate notes.

On Sept. 8, Discovery Communications reported that Discovery Communications, LLC priced a £400 million offering of 2.5% senior notes due 2024.

The notes were priced at 99.875 to yield 2.504%.

Goldman Sachs & Co., Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC were the bookrunners.

Settlement is expected Sept. 21.

These notes will also be guaranteed by Discovery Communications, Inc.

Proceeds will be used for the merger. If the merger is not completed by Aug. 30, 2018, the company will be required to redeem the notes.

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