Fitch Upgrades Cox Enterprises and Subs to 'BBB'; Outlook Stable

Business Wire,  May 28, 2008  

Tags: Cox Enterprises, Microsoft Outlook

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NEW YORK -- Fitch Ratings has upgraded the ratings of Cox Enterprises, Inc. (CEI) and its subsidiaries, Cox Communications, Inc. (CCI) and Cox Radio, Inc. (CXR) as follows:

Cox Enterprises

--Issuer Default Rating (IDR) to 'BBB' from 'BBB-';

--Senior unsecured debt to 'BBB' from 'BBB-';

--Commercial paper to 'F2' from 'F3'.

Cox Communications

--IDR to 'BBB' from 'BBB-';

--Senior unsecured debt to 'BBB' from 'BBB-';

--Commercial paper to 'F2' from 'F3'.

Cox Radio

--Issuer Default Rating (IDR) to 'BBB' from 'BBB-';

--Senior unsecured debt to 'BBB' from 'BBB-';

The Rating Outlook on all ratings is stable.

The ratings are supported by the company's business diversification, conservative fiscal policies, stability of operating businesses, and growth prospects of its cable and Auto Trader segments. Credit concerns include secular issues at the company's newspaper segment, the entrance of the RBOCs (regional bell operating companies) into the cable TV business, the potential impact of disruptive technologies in the television and radio industries, exposure to the auto industry, and cyclical pressure at various business units due to the weakening macro-economic environment.

As would be expected, the general economic slowdown has had an impact on the growth at CEI's advertising based businesses (newspapers, TV, and radio), as well as its Manheim auto auction segment, which is a volume-based business dependent on the auto sector. As such, Fitch believes the general business outlook for CEI is weaker than what would typically be the case for a ratings upgrade, positioning the company at the low end of the 'BBB' rating category. However, we believe the businesses (excluding newspapers) will be able to withstand the current macro environment and further solidify their position in the rating category over the next 12-18 months. Through a combination of cash flow and asset sale proceeds, de-leveraging achieved to date is in line with Fitch's expectations as year-end 2007 leverage ended up just above 3 times (x) on a consolidated basis. Fitch does not expect any material reduction in 2008 gross leverage as a result of several events including the acquisition of the ad network Adify for $300 million and the $305 million auction for wireless spectrum. In addition, the company will continue to make significant investments in its cable and Manheim businesses.

The company continues to benefit from diversified revenue streams that are not highly correlated and generally stable when taken as a whole. Fitch estimates that approximately 25% of total consolidated revenues come from advertising, with the remaining 75% generated through subscriptions and transaction fees. On a consolidated basis, CEI operates in six main businesses (CCI, TV broadcasting, radio broadcasting, Manheim auctions, newspapers, and Auto Trader). CCI continues to produce solid results through enhanced products and lower churn with its bundled offerings. Manheim has a very strong market position in the auto auction industry and the company's TV and radio segments benefit from the high margin and strong free cash flow dynamics of those industries. Despite the economic slowdown and pressure in the auto industry, Fitch still believes the company's Auto Trader segment should continue to produce above-average growth over the intermediate term.

Fitch remains very concerned with the newspaper sector. While this segment only accounts for less than 10% of CEI's consolidated revenue, it still represents in excess of $1 billion of expenses and has experienced significant margin deterioration over the last few years as readers continue to migrate to online sources of news and information. Fitch believes through cost controls (reduction of delivery perimeter, headcount) and its ValPak business that the newspaper segment can partially mitigate some of the existing pressures. In addition, on a consolidated basis, the Auto Trader segment has been able to capture a portion of the lost auto classified advertising of the newspaper business and provides at least a partial hedge.

The RBOCs' fiber deployment plans present an intermediate risk to CCI. Specifically, Fitch believes Verizon's FiOS roll-out presents formidable competition to cable MSOs. This concern is at least partially mitigated by Fitch's estimates of overlap between CCI's subscriber base and Verizon's build-out plans (Fitch estimates overlap to be less than 25% over the next few years). AT&T should have greater overlap with CCI's existing subscriber base; however, Fitch believes CCI will continue to benefit from a first-to-market advantage and should be able to offer, at least, a predominantly similar value proposition to that of AT&T. We believe CCI could accommodate any pricing issues within the 'BBB' rating. From Fitch's perspective, the service bundling strategy used by CCI is appropriate and should continue to focus on up-selling subscribers that take analog video service, as a subscriber that takes multiple services is less susceptible to competitive offers (churn for three-product customers is approximately half that of single-product customers). CCI's investment in the government auction of wireless spectrum mitigates some concern's related to the RBOCs' ability to offer a wireless option among its bundled offerings (as does the uncertainty surrounding actual consumer demand for a wireless bundled option).