Moody’s Downgrades Thomson On Eve Of Reuters Deal

By: E&P Staff

Moody’s Investors Services late Thursday downgraded The Thomson Corp.’s senior unsecured debt rating to Baa1, its minimum investment grade rating, from A3.

Thomson’s agreement to acquire Reuters makes its debt more risky because it is not only borrowing to swing the deal, but selling off a property not significantly affected by business cycles, Moody’s said.

“The downgrade reflects the significant increase in Thomson’s leverage that will result from the pending Reuters acquisition, with pro forma 2007 debt-to-EBITDA (earnings before interest, taxes, deductions, or amortization) at approximately 3.1x (incorporating Moody’s standard adjustments) and free cash flow-to-debt of less than 5%,” Moody’s said.

In May, Thomson agreed to buy Reuters for $17.9 billion. Of that approximately $9.3 billion in cash and approximately $8.6 billion of stock in a new entity called Thomson Reuters plc that will become Reuters’ holding company.

To swing some of the purchase, Thomson plans to raise $7 billion from the sale of its education business, Thomson Learning, and by taking on new debt.

“In Moody’s opinion, the increase in leverage is occurring at a time when the overall business profile of Thomson is more cyclical as a result of the divestiture of the Thomson Learning assets and acquisition of Reuters,” the ratings firm said.

Moody’s said its outlook on Thomson is “stable,” meaning it does not foresee further downgrades now.

Thomson still has good margins and cash flow, Moody’s said, and its expects its debt-to-EBITDA to decline to “a 2.7x range by 2009, which is line with our expectations for the Baa1 rating.”

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