When 21st Century Fox (FOXA) withdrew its $80 billion offer in August 2014 to acquire Time Warner (TWX) , Rupert Murdoch, the company's controlling shareholder, cited the company's "ongoing commitment to disciplined capital allocation and returning value to shareholders."
On that same day, Murdoch said Fox's board had authorized a $6 billion share buyback plan. Fox investors were thrilled. Shares of the global media conglomerate surged 15% over nine straight days of gains, more than erasing an 11% decline in the wake of Fox's July bid to acquire Time Warner.
With such a backdrop, Fox investors were less than pleased that the company on Friday announced plans to spend $14.2 billion, or £11.25 billion, for the remaining stake in Sky, a European satellite TV and internet provider. The target's board has yet to accept the offer, though its independent directors said they would recommend that it do so.
In the wake of the announcement, Moody's on Monday said it was placing Fox's Baa1 rating on its senior unsecured long-term debt on review for a possible downgrade. Fox's shares in late afternoon had tumbled 6.9% to $26.25.
In justifying the offer for Sky, Fox said that acquiring the 60.9% stake in the broadband provider and broadcaster that it doesn't already own would allow the company to better leverage its television and film content over a satellite TV and wireless network that covers the U.K., Germany, Italy, Ireland and Austria. Greater scale, Fox said, would give it more opportunities to offer customers new content packages.
Speculation that Murdoch would try to buy all of Sky has continued ever since he was forced to withdraw an offer in 2010 following revelations that two of his newspapers had aggressive hacked the mobile phones of celebrities, politicians and average people.
Yet the financial gains from the deal would be modest, Wells Fargo media analyst Marci Ryvicker said in an investor note Monday. In fact, she said, the gains would largely come from lowered taxes rather than lower costs as a results of consolidating operations. More concerning, Ryvicker noted, is that by committing $14.2 billion to the deal, Fox likely would reduce its stock repurchasing goals and could be forced to pass on compelling acquisitions.
"We ask, where's the 'story-telling' that the Murdochs seem to love so much?" Ryvicker said. "Yes, this removes the perpetual M&A uncertainty, but we're not so pleased with the fact that Fox's balance sheet is now tied up -- hence, no buybacks or optionality (a little scary to us given the rapidly evolving ecosystem)."
Moody's said its review was prompted by concern that the Sky deal would increase Fox's debt-to-earnings ratio beyond the 3 times threshold necessary to maintain a Baa1 rating.
"If a binding agreement is reached and the transaction is approved by regulators, we expect Fox will utilize much of the cash on its balance sheet (approximately $4.7 billion at [Sept. 30]) and Sky's cash (£2 billion at [June 30]) to fund a portion of the transaction," Moodys said in a report led by Neil Begley, a senior vice president. "The review is prompted by the potential transaction's significant debt financing and the resultant expected higher leverage."
Moody's has a Baa2 rating on Sky with a stable outlook.
A Fox spokesman declined comment.