U.K.-Based Multimedia Sports Content Provider Perform Group #CCC+# Rating Outlook Stable

Stocks and Financial Services Press Releases Friday April 27, 2018 16:32
LONDON--27 Apr--S&P Global Ratings

LONDON (S&P Global Ratings) April 27, 2018--S&P Global Ratings said today that it affirmed its 'CCC+' long-term issuer credit rating on multimedia sports content provider Perform Group Ltd. The outlook is stable.

At the same time, we affirmed our 'CCC+' issue rating on the group's proposed GBP215 million senior secured notes, including the proposed GBP40 million bond tap. The recovery rating is unchanged at '4' indicating our expectation of average recovery (30%-50%; rounded estimate 40%) in the event of payment default.

We also affirmed our 'B' issue rating on the group's GBP50 million super senior revolving credit facility (RCF). The recovery rating is unchanged at '1' indicating our expectation of very high recovery (90%-100%; rounded estimate 95%) in the event of a payment default.

The rating reflects our view that Perform's consolidated credit metrics will remain highly leveraged with negative EBITDA and free cash flow in the next 12 months, driven by the group's continued investment in and buildout associated with its over-the-top (OTT) video on demand service (DAZN). We anticipate that ongoing investment in DAZN will continue to affect the consolidated financial results of Perform, leading to negative EBITDA and free cash flows in the next two years, although DAZN is not part of the restricted group that guarantees the proposed GBP215 million notes. The restricted group includes Perform and its restricted subsidiaries for the purposes of the proposed financing and comprises the group's core historically profitable operations such as its Perform Content, Perform Media, and Perform Sports Cloud operating divisions. The unrestricted group includes Perform Investment Ltd. and its subsidiaries, which contains the OTT DAZN operations.

We base our analysis and assessment approach for deriving our issuer credit rating on the consolidated financials of Perform Group. We refer to this approach by signifying "consolidated" when we refer to "Perform" or the "Perform group" in this report. Where information is otherwise presented for the benefit of readers, for example particularly on the restricted group, we indicate as such.

In FY2017, Perform increased its revenues to GBP439 million from GBP287 million in FY2016, an increase of approximately 53%. On a restricted group basis, revenues grew to GBP377 million in FY2017 up from GBP289 million in FY2016, an increase of approximately 30%. The consolidated FY2016 revenues are less than the restricted group due to intercompany eliminations, and also noting the DAZN business was established in 2016.

We anticipate that the restricted group will expand in FY2018, with forecast revenue growth of 5%-10%, year-on-year from GBP377 million in 2017. The Perform Content division continues to comprise the material part of the restricted group, contributing around 74% of revenues in FY2017. Perform Content consists of media partnerships and broadcast sales, including also B2B products sold to betting markets and as media content. Examples include a rights partnership with the Women's Tennis Association (WTA), to commercialize the global media rights for WTA and the provision of live video and sports data to betting and bookmaker operators.

Historically the content business, part of the restricted group, would renew the majority of its customer contracts relating to its betting market clients on a three-year cycle leading to a "contract renewal cliff." We note that recent contract renewal completions in FY2017 have resulted in two-to-five-year contracts at renewal rates above 95%. This is particularly positive given the underlying consolidation in the U.K. betting market. The group has also increased the number of content licenses available and we note that approximately 55% of content revenues are contracted until 2021. We view the development toward greater contract renewal diversity and contracted subscription style components favorably.

The content business has achieved organic growth through i) additional licenses contracted; ii) price inflation; and iii) package mix, including upselling content packages. Perform also has strategic partnerships with the International Basketball Federation (FIBA), the WTA, and the National Basketball Association (NBA). The partnerships have in aggregate required working capital outflows from Perform. However, they are expected to contribute to content business growth moving forward.

Perform's media business, part of the restricted group, makes up around 17% of restricted group revenues in FY2017. The group has experienced softer performance in this division in FY2017, with performance hampered by the U.S. e-player business and a difficult competitive environment, and ultimately shut down the U.S. e-player operation in first quarter 2017. We anticipate that FY2018 will provide upside to this operation given it is a football World Cup year.

In August 2016, Perform Group launched its OTT start-up business, part of the unrestricted group, launching the website www.dazn.com in Japan, Germany, Austria, and Switzerland, and having since launched in Canada. On this website, users can watch sports championships live and on-demand, using any device (computers, laptops, tablets, or smartphones). Currently, DAZN has rights to show games from the National Football League, NBA, Premier League, La Liga, and League 1 championships. The group has committed to significantly expanding its rights portfolio over the next 10 years. Perform is receiving funding support on a rolling basis, currently in the form of shareholder loan contributions into the unrestricted group to help fund the expansion.

Our understanding is that trading in launched markets is in line with management expectations. DAZN's largest rights are the Japanese J League and the group has partnered with a mobile operator to drive further subscriber growth. In Germany, Austria, and Switzerland the group is developing a subscriber base through core European football and U.S. sports content, combined with one-off events. Canada has also launched the service, and we expect DAZN to both increase its existing rights portfolio and expand into new markets in the forecast period.

Our assessment of Perform is based on consolidated performance, however with consolidated group free operating cash flow (FOCF) and EBITDA forecast as negative for FY2018 and FY2019, we additionally provide credit metrics for our base-case forecasts on the restricted group. We forecast S&P Global Ratings-adjusted debt to EBITDA of 5.3x–5.8x in FY2018 for the restricted group. We forecast EBITDA-to-interest coverage ratio of about 2.0x in FY2018 for the restricted group.

In our base case for the consolidated Perform group, we assume:
  • Growth in the U.K. economy of 1.3% in 2018 and 1.5% in 2019. Growth in the eurozone of 2.3% in 2018 and 1.9% in 2019.
  • We believe that revenue growth performance in the consolidated group will be largely uncorrelated with economic growth due the group's specific expansion strategy of continued rights acquisition, potential additional region expansion, and plan to create a leadership position in digital sports streaming.
  • Continued strong revenue growth in 2018 and 2019, based on continued organic revenue growth in content from new licenses; bundling and price growth; revenues from WTA and FIBA contracts; continued organic and cross-sell opportunities in media and Perform sports cloud; and a ramp-up in user subscriptions in DAZN.
  • Continued investment in the DAZN business will affect both consolidated EBITDA and cash flow generation. We forecast adjusted negative EBITDA of GBP475 million-GBP525 million and FOCF greater than -GBP700 million in 2018 and 2019, on a group consolidated basis.
In our base case for the restricted group, we assume:
  • Revenue growth of between 5%-10% in FY2018 and 20%-25% in FY2019.
  • Adjusted EBITDA margins of around 11% in FY2018 and 16% in FY2019.
  • Restructuring and exceptional costs of GBP2 million-GBP4 million and capitalized product development costs of GBP10 million-GBP11 million in FY2018 and FY2019.
  • Adjusted EBITDA of GBP30 million-GBP35 million in FY2018 and GBP42 million-GBP47 million in FY2019.
Based on these assumptions, we arrive at the following credit measures for the restricted group:
  • Adjusted debt to EBITDA of 5.3x-5.8x in FY2018.
  • EBITDA interest coverage of around 2.0x in FY2018.

The stable outlook signifies that we do not expect any liquidity issues for Perform over the next 12 months, despite our view that the group's capital structure is unsustainable in the long term. We also expect the group's primary shareholder, Access Industries, to support continued growth in the DAZN business via further capital contributions.

In our view, Perform is dependent upon favorable business, financial, and economic conditions to meet its long-term financial commitments. We expect that continued investment in DAZN, including significant content rights expenses in addition to the low level of earnings compared with working capital outflows concerning funding of sport rights purchases will weigh on consolidated cash flows of the group.

We could lower the ratings if we view Perform's consolidated liquidity position weakening, including because of a lack of continued funding support from Access or meaningful cash leakage from the group via dividends or repayment of existing shareholder loans. In addition, we could lower the ratings if we saw evidence of the restricted group providing financial support to its start-up OTT business or based on our assessment of increasing risks of default under financial covenants.

We consider an upgrade unlikely at present, as we incorporate continued investment by Perform into its DAZN unrestricted group, resulting in negative EBITDA and free operating cash flow in our forecast. Given the highly leveraged capital structure, an upgrade would hinge on earnings and credit metrics improving sustainably.

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