Fitch: WBD JV neutral for BT’s rating
May 17, 2022
By Colin Mann
BT Group’s proposed joint venture with Warner Bros Discovery is neutral to BT’s rating, according to credit rating agency Fitch Ratings, who expect the impact on its credit metrics to be limited. “Deconsolidation of the JV should not affect the group’s EBITDA significantly, while the impact on net debt at transaction close is expected to be small relative to BT’s overall debt quantum,” it advises.
The 50:50 JV between BT and Warner Bros will provide extensive sports content from BT Sport and Eurosport UK (including via streaming service discovery+) to customers in the UK and Ireland.
While BT will retain the ability to offer content on its platform and therefore continue to earn revenue from retail customers, Fitch believes this transaction will enable BT to free up investment capacity to support the build-out of fibre and 5G and focus on other initiatives critical to BT’s success in maintaining its market position as incumbent and realising its future growth aspirations in a competitive market.
Additionally, with the benefit of scale and focus, the JV is likely to be in a better position to build an effective content proposition. This should support BT’s service convergence and pricing strategy, enabling it to offer a wider range of content choice as part of its bundled packages without the heavy financial burden that accompanies content ownership.
According to Fitch, the potential revenue impact from the loss of the ownership of BT Sport is expected to be approximately £500 million (€593m)-£600 million on an annualised basis. In contrast, total adjusted revenue for the consumer division was £9.9 billion and total group revenue was £20.9 billion at financial year to March 2022. The BT Sport business recorded an operating loss of £222 million and is not a major EBITDA contributor.
Under the JV, both companies will contribute their content rights into the JV and along with Sky, enter into long-term distribution agreements extending beyond 2030. BT’s agreement will have a minimum annual revenue guarantee of £500 million for the JV for the first four years. The transaction is set to close by end-2022.
BT is expected to receive £93 million from Warner Bros over three years post-deal completion and potential earn-outs of up to £540 million during a period of four years, if certain conditions are met. Warner Bros will also be given a four-year call option to acquire BT’s entire shareholding in the JV, exercisable at specific points. The earn-out could be made earlier if certain conditions are achieved or if the call option is triggered, providing BT a useful option to cash out in future, suggests Fitch.