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Alibaba to spend $7B on content; Qualcomm fined in South Korea

Flying Into The Danger Zone; Norwegian Air Shuttle

Banking

Street Talk Episode 39 - A New Era For Blockbuster Bank M&A

Advertising Market Growth Unable To Keep Up With Strong GDP

Street Talk Episode 38 - PG&E Bankruptcy Reveals Climate Change Risk Facing Calif. Utilities


Alibaba to spend $7B on content; Qualcomm fined in South Korea

TOP NEWS

* Alibaba Digital Media and Entertainment Group, the entertainment affiliate of Alibaba Group Holding Ltd., will invest more than 50 billion Chinese yuan, or about US$7.2 billion, in content over the next three years, Reuters reports, citing an internal email by the affiliate's new CEO, Yu Yongfu.

* As expected, South Korea's Fair Trade Commission imposed a fine of 1.03 trillion South Korean won, or about US$853 million, on U.S. chipmaker Qualcomm Inc. and its two affiliate units for abusing a dominant market position. Qualcomm will appeal the ruling to the Seoul High Court, including the fine's amount and the way it was computed.

JAPAN

* Panasonic Corp. announced an agreement with Tesla Motors Inc. to produce solar cells and modules at the U.S. electric carmaker's factory in Buffalo, N.Y. The deal includes an investment of more than ¥30 billion from the Japanese tech firm, Reuters reports.

* Dentsu Inc.'s CEO said he will step down over the suicide of a female employee from overwork, according to Jiji Press. Tadashi Ishii announced his resignation after authorities sent evidence to prosecutors on the case, which has shaken Japan's largest advertising agency and triggered debate over the country's high-pressure work culture.

* Sony Corp. aims to market OLED televisions globally by the summer, with sales starting in the U.S., Europe and China as early as spring, according to The Nikkei. Sony will deploy proprietary image-processing technology for high-resolution TVs that use organic light-emitting diodes, and source panels from South Korea's LG Display.

SOUTH KOREA

* T-Mobile US Inc. started rolling out a software update to prevent unreturned units of Samsung Electronics Co. Ltd.'s discontinued Galaxy Note 7 smartphone from charging their batteries, OSEN reports. The update aimed at ending ongoing use of the handsets will also be implemented in the U.S. by Verizon Communications Inc., AT&T Inc. and Sprint Corp.

* The Korea Fair Trade Commission fined cable TV operator D'Live 250 million South Korean won for reducing the commission fees paid to its suppliers without clear contractual grounds, ZDNet Korea reports. The watchdog also issued a corrective order to the company for forcing suppliers to attract new subscribers by assigning monthly targets.

* The South Korean government finalized new guidelines for mobile handset recalls, Chosun Biz reports. Under the new rules, the handset manufacturer should decide on specifics of recall procedures, including a time period and locations, within three days of a recall decision in cooperation with telcos, and notify the users within a week.

CHINA, HONG KONG AND TAIWAN

* The Cyberspace Administration of China issued details of the cybersecurity law framework laid out in November, stating that key Chinese industries must review the security of technology to avoid unfair competition and harming the interests of others. It also called for respecting cybersovereignty, allowing states to monitor internet services within their own borders.

* LeSports, the sports unit of Chinese tech giant LeEco, reached a deal with Beijing-based Super Sports Media Group to continue broadcasting English Premier League matches until Jan. 3, 2017, despite having unpaid rights fees, Tencent News reports. LeEco also announced that it secured 10 billion Chinese yuan in funding from more than one institutional investor.

* State-funded Shanghai United Media Group obtained 610 million Chinese yuan in funding from six state-owned enterprises for its online news website ThePaper.cn, Sina reports. The group also announced the restructuring of its publications, under which the Oriental Morning Post will stop publishing from Jan. 1, 2017, and its content will be reallocated in The Paper.

SOUTHEAST ASIA

* True Corp. subsidiary True Incube Co. Ltd. purchased 20 million common shares of Canadian company Capstream Ventures Inc. for 268.47 million Thai baht, giving it an 8.84% stake in the company. It also announced the establishment of True Axion Games Ltd., a joint venture between the two companies and Red Anchor (Thailand) Co. Ltd. that will focus on video game and app development.

* Malaysian telco Maxis Berhad is acquiring the rest of the 25% stake it does not own in Malaysia's Advanced Wireless Technologies Sdn Bhd (AWT) from Astro Malaysia Holdings Bhd for 15.8 million Malaysian ringgit, The Sun Daily reports. AWT owns UMTS (Malaysia) Sdn Bhd, which holds a 2,100 MHz spectrum assignment that expires in April 2018.

* Thailand's National Broadcasting and Telecommunications Commission met with 12 of the country's largest ISPs to order 36 websites to be blocked for hosting pirated movies and TV shows, Manager reports. The meeting was called at the request of the National Federation of Motion Pictures and Contents Associations, which also opened up a criminal investigation with the Economic Crime Suppression Division.

* In other NBTC news, a consumer protection subcommittee rejected TrueVisions' proposed compensation package for subscribers affected by the loss of six key entertainment channels including HBO, Krungthep Turakij reports. An NBTC commissioner said TrueVisions' replacement content is inadequate to cover the loss of the six channels, and ordered the company to submit a revised proposal next month.

* Singaporean broadcaster MediaCorp Pte. Ltd. and Indonesian online wedding portal Bridestory decided to end their joint venture in Singapore, Channel News Asia reports. The JV was established in July 2015 and allowed both companies to pool resources and produce content for Singapore's wedding market through the Bridestory.com.sg portal.

* Indonesian telco Telkomsel signed a partnership agreement with a number of banks as part of its effort to expand its sales distribution channels, Tribun Bali reports. The partnership, which will last from 2017 until 2019, includes sales of prepaid card balances through ATM, internet banking, SMS banking and mobile banking.

* Thailand's Army Cyber Center denied that it purchased surveillance equipment designed to hack into encrypted computer traffic, Khaosod reports. Online activist group Single Gateway: Thailand Internet Firewall shared pictures on social media of what it claims are leaked procurement documents from the military, which has since vowed to take legal action against the group for spreading false information online.

AUSTRALIA AND NEW ZEALAND

* Vodafone Plc's Australian unit will temporarily deploy portable cells on wheels to boost mobile coverage in high-traffic areas for the New Year's holiday, ZDNet reports. These areas include Sydney Harbor, Bondi Beach, Byron Bay and the Whitsunday Islands.

* NBN Co Ltd., the company tasked with the A$50 billion rollout of Australia's National Broadband Network, expects to extend the project to Sydney and other business districts by 2020, The Australian reports. Karina Keisler, NBN's corporate affairs chief, said the company is focused on bringing the National Broadband Network to rural, regional and underserved areas first.

INDIA AND SOUTH ASIA

* Reliance Jio sought an extension to respond to telco regulator Trai's question about its "Happy New Year" promotional offer. According to the Press Trust of India, Trai asked RJio on Dec. 20 to explain within five days why the telco's extension of its free voice and data plan from September should not be considered a violation of guidelines that require promotional offers to last only 90 days.

* The Competition Commission of India approved the proposed purchase of a 2% stake in handset manufacturer Micromax by Madison India Opportunities Trust Fund, the Press Trust of India reports.

* Bermuda-based ABS Satellite signed a multi-transponder agreement to provide direct-to-home broadcast services in Nepal, Rapid TV News reports. The platform, scheduled to go live in February 2017, will deliver 170 local and international TV channels, covering Nepal and its neighboring countries in South Asia.

FEATURED NEWS

US Media & Comm director moves through Dec. 28: S&P Global Market Intelligence presents a rundown of board changes in the media and communications industries.

Briefing Room: 2016's biggest influencers in European media, telecommunications: This year's shortlist of people with outsized influence in the European media and telecoms landscape includes corporate power brokers, a presenter and a politician.

FEATURED RESEARCH

Broadcast Investor: TV station live streaming picks up steam with new players: With options increasing for cord-cutters looking for live broadcast TV content, we present a comprehensive analysis of the top VSP and OTT services offering local station feeds in the U.S.

Economics of Internet: Amazon Prime video expansion necessitates big content spend: Jumping into head-to-head competition with Netflix around the world, Amazon Prime is available in 200-plus countries as of Dec. 14.

Joji Sakurai, Myungran Ha, Emily Lai, Patrick Tibke and Ed Eduard contributed to this report. The Daily Dose has an editorial deadline of 7 a.m. Hong Kong time. Some external links may require a subscription.


Credit Analysis
Flying Into The Danger Zone; Norwegian Air Shuttle

Highlights

This analysis was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global. This is not investment advice or a stock suggestion.

Feb. 13 2019 — The headwinds are picking up for Norwegian Air Shuttle ASA (“Norwegian”), the eighth largest airline in Europe. The carrier has been battling with rising fuels costs, increased competition from legacy carriers, and persistent aircraft operational issues. Norwegian’s problems are a continuation of what have been turbulent months for budget airlines in Europe resulting in a collapse of Primera Air, based in Denmark, near-default of WOW air, Iceland’s budget carrier, and most recently bankruptcy of Germania.

When we pull back the curtain and review the creditworthiness of European airlines to explore further some of the causes for Norwegian’s turbulent period, we see Norwegian’s business strategy and financial structure have made the carrier highly exposed. Coupled with the traditionally slow winter season, the airline may have to navigate through the storm clouds forming on the horizon.

A View From Above

S&P Global Market Intelligence has developed CreditModelTM Corporates 2.6 (CM2.6), a statistical model trained on credit ratings from our sister division, S&P Global Ratings. The model combines multiple financial ratios to generate a quantitative credit score and offers an automated solution to efficiently assess the credit risk of both public and private companies globally.1 Within CreditModel, the airline industry is treated as a separate global sub-model to better encompass the unique characteristics of this industry.

Figure 1 shows the overview of S&P Global Market Intelligence credit scores obtained using CreditModel for European airlines. Norwegian’s weak position translate into the weakest credit score among its competitors. The implied ‘ccc+’ credit score suggests that Norwegian is vulnerable to adverse business, financial, or economic conditions, and its financial commitments appear to be unsustainable in the long term. In addition to Norwegian, Flybe and Croatian Airlines rank among the riskiest carriers in Europe and share a similar credit risk assessment. The airlines with the best credit scores are also Europe’s biggest airlines (Lufthansa, Ryanair, International Airlines Group (IAG), and easyJet). The exception among the top five European airlines is Air France-KLM, which is crippled by labour disputes and its inability to reshape operations and improve performance.

Figure 1: Credit Risk Radar of European Airspace
Overview of credit scores for European airlines

Source: S&P Global Market Intelligence. For illustrative purposes only.
Note: IAG operates under the British Airways, Iberia, Vueling, LEVEL, IAG Cargo, Avios, and Aer Lingus brands. (January 3, 2019)

S&P Global Market Intelligence’s sister division, S&P Global Ratings, issued an industry outlook for airlines in 2019 noting that the industry is poised for stability.2 It stated the global air traffic remains strong and is growing above its average rate at more than 6% annually. The report also cited rising interest rates dampening market liquidity while increasing the cost of debt refinancing and aircraft leases. Oil prices are expected to settle, and any further gradual increases in oil prices are expected to be compensated by rising airfares and fees. The most significant risks for airlines are geopolitical. Potential downside scenarios include a crisis in the Middle East or other disruptions in oil, causing oil prices to spike. The possibility of trade wars and uncertainty surrounding the Brexit withdrawal agreement represent additional sources of potential disruption or weakening in travel demand.

Flying into the danger zone

Although Norwegian has so far dismissed any notion of financial distress as speculation, it has simultaneously implemented a series of changes to prevent further turbulence.3 The airline announced a $230mm cost-saving program that included discontinuing selected routes, refinancing new aircraft deliveries, divesting a portion of the existing fleet, and offering promotional fares to passengers to shore up liquidity.

In Figure 2, we rank Norwegian’s financial ratios within the global airline industry and benchmark them against a selected set of competitor European budget carriers (Ryanair, easyJet, and Wizz Air). Through this chart, we can conclude that Norwegian’s underlying problems are persistent and the company’s financial results are weak. Norwegian’s business model of rapid growth and a debt-heavy capital structure have resulted in severe stress for its financials. Norwegian ranks among the bottom 10% of the worst airlines in the industry on debt coverage ratios, margins, and profitability. This is in sharp contrast to other European budget carriers, which are often ranked among the best in the industry. On the flip side, Norwegian’s high level of owned assets represents its strong suit and gives the carrier some flexibility to adjust its operations and improve performance in the future.

Figure 2: Flying at Low Altitude
Norwegian’s financial ratios are among the worst in the industry

Source: S&P Global Market Intelligence. For illustrative purposes only. (January 3, 2019)
Note: Presented financial ratios are used in CreditModelTM Corporates 2.6 (Airlines) to generate quantitative credit score in Figure 1.

Faster, Higher, Farther

Norwegian has undergone a rapid expansion in recent years, introducing new routes and flying over longer distances. Between 2008 and 2018, the carrier quadrupled its fleet from 40 to 164 planes.4 This enabled it to fly more passengers and become the third largest budget airline in Europe, behind Ryanair and easyJet. However, unlike its low-cost rivals, Norwegian ventured into budget long-haul flights. After establishing its new base at London Gatwick, it started operating services to the U.S., South-East Asia, and South America.

As a result of this expansion, Norwegian’s capacity as measured by available seat kilometres (ASK) and traffic as measured by revenue passenger kilometres (RPK) grew nine-fold between 2008 and 2018, as depicted in Figure 3. By offering deeply discounted fares, the carrier was able to attract more passengers and significantly grow its revenues, which were expected to reach $5bn in 2018. However, to be able to support this rapid growth, Norwegian accumulated a significant amount of debt and highly increased its financial leverage. This rising debt is putting Norwegian under pressure to secure enough liquidity to repay maturing debt obligations.

Figure 3: Shooting for the Stars
Norwegian’s rapid growth propelled by debt

Source: S&P Global Market Intelligence. All figures are converted into U.S. dollars using historic exchange rates. Figures for 2018 are estimated based on annualized YTD 2018 figures. For illustrative purposes only. (January 3, 2019)

Norwegian’s strategy to outpace growing debt obligations by driving revenue growth is coming under pressure. The data tells us that expansion to the long-haul market and the undercutting of competitors to gain market share proved to be costly and negatively impacted Norwegian’s bottom line. Operational performance, measured as unit revenue (passenger revenue per ASK) and yield (passenger revenue per RPK), have been slipping continuously since 2008, as depicted in Figure 4. Negative free operating cash flow required Norwegian to continuously find new sources of capital to finance its operations, and profitability suffered. The carrier was able to ride a tailwind of low oil prices and cheap financing for a while, however, the winds seem to be turning.

Figure 4: Gravitational Pull
Slipping operational and financial performance

Source: S&P Global Market Intelligence, Norwegian Air Shuttle ASA: “Annual Report 2017”, Norwegian Air Shuttle ASA: “Interim report - Third quarter 2018”. Figures for 2018 are estimated based on annualized YTD 2018 figures. For illustrative purposes only. (January 3, 2019)

Norwegian’s plan to outrun a looming mountain of debt obligations is resulting in a turbulent flight. While growing its top line, the carrier has been unable to convert increased capacity and traffic into consistent profit. With a stable industry outlook and cost-cutting measures in place, Norwegian lives to fly another day. However, any additional operational issues or adverse macroeconomic developments could send Norwegian deep into the danger zone.

Learn more about S&P Global Market Intelligence’s Credit Analytics models.
Learn more about S&P Global Market Intelligence’s RatingsDirect®.

S&P Global Market Intelligence leverages leading experience in developing credit risk models to achieve a high level of accuracy and robust out-of-sample model performance. The integration of Credit Analytics’ models into the S&P Capital IQ platform enables users to access a global pre-scored database with more than 45,000 public companies and almost 700,000 private companies, obtain credit scores for single or multiple companies, and perform scenario analysis.

S&P Global Market Intelligence’s RatingsDirect® product is the official desktop source for S&P Global Ratings’ credit ratings and research. S&P Global Ratings’ research cited in this blog is available on RatingsDirect®.

1 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.
2 S&P Global Ratings: “Industry Top Trends 2019: Transportation”, November 14, 2018. https://www.capitaliq.com/CIQDotNet/CreditResearch/viewPDF.aspx?pdfId=36541&from=Research.
3 Norwegian Air Shuttle ASA, “Update from Norwegian Air Shuttle ASA”, press release, December 24, 2018 (accessed January 3, 2019), https://media.uk.norwegian.com/pressreleases/update-from-norwegian-air-shuttle-asa-2817995.
4 Norwegian Air Shuttle ASA: “Investor Presentation Norwegian Air Shuttle”, September 2018.

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Tesla Contemplates Going Private; But Who Is Going to Power Its Batteries

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Sears Strikes Out What Is In Store For Other Retailers In The US

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Listen: Street Talk Episode 39 - A New Era For Blockbuster Bank M&A

Feb. 08 2019 — The days of large bank buyers pursuing deals to plant a flag in a new market might be gone with acquirers now seeing deals as a way to support investments in technology. BB&T touted that prospect when discussing its landmark merger of equals with SunTrust. In the episode, we spoke with S&P Global Market Intelligence colleagues Zach Fox and Joe Mantone about the drivers of BB&T/SunTrust merger, how much i-banks advising on the deal stand to earn and the prospect of other similarly sized transactions emerging in the future.

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No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).


Technology, Media & Telecom
Advertising Market Growth Unable To Keep Up With Strong GDP

Feb. 07 2019 — Cable and broadcast are losing their dominance in the viewing world. As more eyeballs migrate to online and mobile viewing, major media companies are struggling to adopt a common measurement system. Their goal is to track and consolidate the leaked viewers who have been switching first from analog, with a full ad load, to DVR, which lets them skip ads, and now to digital with limited or no advertising.

Click here for advertising market projections in Excel format.

The business models of the online services differ, with the majority of viewers still watching ads, albeit in much smaller pods. Others have voted with their wallets, paying a premium to view content on Hulu and other platforms without any advertising at all. Hulu with ads is only $5.99, while the subscription without ads is twice the price at $11.99. Clearly, viewers are willing to pay a premium for the privilege of not having to watch ads.

Although the broadcast networks have been somewhat flat for some time, the cable network industry has only recently had to cope with the reality that its heyday is over. After decades of showing strong single- or double-digit growth, cable networks have seen growth slow over the past five years to a range of just 3% to negative 1%.

A number of issues have been impacting cable networks, most notably cord cutting and cord shaving, with companies that are big in the children's market suffering disproportionately. Viacom Inc. was the first to show significant weakness: Gross ad revenue at its behemoth Nickelodeon peaked at nearly $1.3 billion in 2010 and 2011, then dropped to $1.10 billion in 2012. Nickelodeon's average 24-hour rating slipped from 1.44 in 2011 to 1.13 in 2012.

The company recovered slightly to a 1.2 rating in 2013 but has struggled significantly since then, with its overall rating at just 0.74 in 2017.

Parent company Viacom posted zero to negative ad revenue growth from the second quarter of 2014 all the way through the third quarter of 2018, an unprecedented negative run.

By contrast, the other cable network owners posted mixed results, but none have been as consistently negative as Viacom. The timing of big sporting events, especially the Olympics, contributes to much of the volatility at the various networks.

Broadcast and cable combined, including both local and national spots, increased ad revenue market share from 24% in 1988 to 32% in 2018. This was a strong showing given that cable alone rose from a less than 2% share in 1988 to almost 15% in 2018.

Overall, the ad market has continued to grow, mostly due to the popularity of digital spots. However, growth in the U.S. advertising market has been unable to maintain its historical trend of growing in lockstep with the gross domestic product, equating to approximately 2% of GDP.

Its share of GDP was generally in that range until the Great Recession, which pushed that metric from 1.8% in 2007 to 1.6% in 2008 and to 1.4% in 2009. In 2017, we estimate this fell as low as 1.2% with no sign that it can recover to the 2.0% range.

Although the growth of digital has been positive for the ad industry, there have been many less encouraging stories, particularly related to print, which shrank from 67.4% of the market in 1988 to just 41.1% in 2018.

Even after this dramatic shift over several decades left print with a much smaller base, all forms of print continue to struggle. Although the numbers below for the print sector do not include their digital operations, few companies have been able to offset the decline in traditional media with online initiatives.

Much of their revenue has been devoured by the usual internet giants such as Alphabet Inc.'s Google LLC and Facebook Inc. Even companies with disruptive business models targeting the younger generation, such as VICE Media LLC, have struggled.

We do not expect this to change much in our five-year outlook, although digital is certainly entering a mature phase. In 2023, we expect satellite radio to be growing the fastest, albeit from a much smaller base, and digital — although still in the No. 2 spot — is expected to grow at only 4.1% per year, down significantly from the 10.9% growth rate we expect for 2019.

Print is expected to continue to struggle, with Yellow Pages hit the hardest, declining at more than 16% per year. We do not expect most of these paper directories to survive over the long term, with the exception of those with very narrow niche audiences, such as small directories delivered to hotels in resort towns.

Digital has had remarkable progress, with a CAGR of 16.8% from $22.65 billion in 2009 to $91.89 billion in 2018. In sharp contrast, direct mail, the largest ad category in 2009, shrank from $44.50 billion in 2009 to $37.50 billion in 2018. The CAGR of decline has been modest at negative 1.9%.

Direct mail is now in third place with market share of 14.7% in 2018 versus 22.3% in 2009, behind digital at 35.9% and cable TV at 14.8%. The biggest slides occurred in Yellow Pages, which have fallen at a CAGR of negative 19.7% from a 5.5% share in 2009 to less than 1% in 2018; and daily newspapers, which contracted at a negative 11.8% CAGR from 12.4% in 2009 to 4.0% in 2018.

For a lengthy analysis which also includes an analysis of performance of the local ad market versus national, refer to the Economics of Advertising, or Click here.

Economics of Advertising is a regular feature from Kagan, a group within S&P Global Market Intelligence's TMT offering, providing exclusive research and commentary.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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Listen: Street Talk Episode 38 - PG&E Bankruptcy Reveals Climate Change Risk Facing Calif. Utilities

Feb. 06 2019 — The PG&E Corp. bankruptcy shows that financial backers of California utilities need to consider the risks associated with climate change but that exposure might be unique to entities operating in the state. In the episode, Regulatory Research Associates analysts Dan Lowrey and Dennis Sperduto discuss the next steps in PG&E's bankruptcy process, the future of its power purchase agreements and the risks that climate change can bring to backing utilities.

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No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).