The battle for Fox is going to put a huge dent in the winner’s balance sheet.
Disney’s raising its offer to $38 per share on Wednesday already has the Mouse House in the dog house.
Moody’s Investors Service responded to the $10-a-share increase by putting the company’s debt “on review for downgrade.”
After crunching the numbers, the credit-rating service said a successful acquisition of both Fox and Sky at current bid prices would boost Disney’s debt/Ebitda ratio to 4.0x.
That compares with a ratio of 1.3x for Disney in 2017.
“Ratios higher than 4 or 5 typically set off alarm bells because this indicates that a company is less likely to be able to handle its debt burden,” according to Investopedia.
And the ratio will get only worse if Disney persists in a bidding war with Comcast for Fox’s film and television studios, cable entertainment networks and international TV businesses.
A bid increase of $6 — to $42 for each Fox share — would increase Disney’s debt/Ebitda ratio to 4.1x, while a $46 price would leave Disney with a ratio of 4.3x, Moody’s Senior VP Neil Begley said.
For Comcast, however, even meeting Disney’s sweetened bid would put its balance sheet in a precarious position.
“We’ve ever said we would be willing to deploy our balance sheet to advance our strategic objectives,” Disney CFO Christine McCarthy said on boosting the bid.
Comcast’s bid is cash-only, whereas Disney’s offer is half cash and half stock, meaning it costs Comcast $1 for every additional $1 it pays to buy Fox. Disney will be able to cover half of its price by issuing new shares.
Moody’s Begley calculated that Comcast’s meeting Disney’s $38 offer would increase the cable company’s debt/Ebitda ratio to 4.5x. Going to $42 would take the ratio to 4.7x, he said, and to $46 to 4.9x.
Moody’s already downgraded Comcast last month on its initial Fox bid.