DBRS Places DHX Media Under Review with Negative Implications

DBRS Limited (DBRS) has today placed the ratings of DHX Media Limited (DHX or the Company) and its related entities Under Review with Negative Implications following the Company’s announcement that it has signed definitive agreements (the Agreements) to acquire the entertainment division of Iconix Brand Group, Inc. (Iconix), which includes an 80% interest in Peanuts Holdings LLC (Peanuts) and a 100% interest in IBG Borrower LLC.

The remaining 20% interest in Peanuts will continue to be held by the members of the family of Charles M. Schulz. The transaction is valued at USD 345 million (approximately CAD 458 million) and is expected to close on or around June 30, 2017. The Boards of Directors for DHX and Iconix have approved the transaction, which is subject to approval under the Hart-Scott-Rodino Antitrust Improvements Act.

The transaction is intended to be financed through a combination of cash on hand, a new debt financing facility and a new convertible debenture issue. DHX has entered into a financing commitment agreement with RBC Capital Markets and Jefferies Finance, LLC to provide a fully underwritten debt financing, covering the purchase price and refinancing substantially all of DHX’s currently outstanding debt. The financing includes up to USD 585 million (approximately CAD 777 million) in term facilities, of which approximately USD 510 million (approximately CAD 677 million) is expected to be drawn upon the transaction’s closing. Additionally, and also commensurate with signing the Agreements, DHX has entered into an agreement with a syndicate of underwriters to issue on a bought deal basis CAD 125 million senior unsecured convertible debentures (the Convertible Offering). The Convertible Offering is expected to close on or about May 31, 2017, and proceeds will be held in escrow and released to the Company upon completion of the acquisition. As part of the refinancing related to the acquisition, DHX will redeem its 5.875% Senior Unsecured Notes due December 22, 2021, of which CAD 225 million in principal amount is currently outstanding, and will also repay its Amended and Restated Senior Secured Credit Agreement, valued at approximately CAD 70 million as of the most recent quarter. In aggregate, contingent upon completing the acquisition, DHX is expected to issue approximately CAD 802 million in debt and redeem approximately $295 million, resulting in an estimated net increase in debt of approximately $508 million.

The Under Review with Negative Implications status reflects the increase in financial leverage that would result from the acquisition. DBRS estimates that lease-adjusted debt-to-EBITDA will increase to over 6.0 times (x) as a result of incremental debt on account of the transaction, from approximately 3.22x on a last 12-month basis. Consequently, DHX’s credit risk profile is unlikely to remain consistent with its current rating.

That said, DBRS notes that the acquisition is expected to be 25% to 30% accretive to DHX’s free cash flow in the first full year of operations and that the Company is committed to allocating cash flow toward reducing debt in order to achieve its leverage target of 3.0x by the end of F2019. DBRS also notes that DHX expects to realize $25 million in annual cost synergies within the first five years, of which $5 million is expected to be realized within 12-months post-closing.

DBRS believes that while the increase in financial leverage will likely require a negative rating action, the degree of such an action may be moderated by the significant strategic and operational benefits that DHX is poised to realize on account of the acquisition. Therefore, in its review, DBRS will focus on assessment of (1) the current business risk profile of the combined entity, including the scale, geographic diversification and operating unit utilization benefits of adding two iconic brands to its programming portfolio; (2) the risks associated with integration, achieving expected cost synergies and the execution of business development opportunities; (3) DHX’s financial risk profile on a pro forma basis (with particular emphasis on free cash flow generation); and (4) the Company’s longer-term business strategy and financial management intentions, including its deleveraging plan.

DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status before the closing of the transaction.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Television Broadcasting Industry and DBRS Criteria: DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.