Company Town: Disney’s Mega-Merger : FINANCES : Deal Won’t Be a Strain on Disney, Analysts Say

With its low debt and high credit rating, Walt Disney Co. should be able to absorb the acquisition of Capital Cities/ABC Inc. without even breathing heavily, Wall Street observers said Monday.

“This is the least leveraged mega-deal I can think of,” said analyst Paul Marsh of NatWest Securities in New York.

Moody’s Investors Service and Standard & Poor’s, the two leading credit-rating agencies, placed Disney and Capital Cities/ABC on credit watch Monday, warning that the ratings of their corporate bonds might fall because of the high debt to be taken on in the deal.

But other analysts were less cautious, noting that Disney pointedly said it would not need to sell assets to help finance the deal, but would pay for it through bond issues and bank loans.

Assuming that Disney borrows $10 billion, the total long-term debt of the combined companies would be about $13.5 billion. Subtract the $2 billion in cash now held in the two companies’ treasuries, and the post-merger Disney would have to service debt of about $11.5 billion.

That is a big number, but it is less than three times the merged firm’s annual cash flow of $4 billion.

In previous mergers between media giants--for example, Time Inc.’s combination with Warner Communications Inc., and Viacom Inc.’s takeover of Paramount Inc.--the debt was five or six times annual cash flow, Marsh said. Both Time Warner and Viacom have struggled with their huge debt loads.

Disney executives joked that the number of phone calls to the company from the media Monday might be exceeded only by the number of calls from bankers eager to get in on the deal.

Analysts guessed that Disney might have to pay interest rates of 7.25% to 7.5% on the new debt--a low rate, given that 30-year U.S. Treasury bonds Monday yielded 6.84%. Not only are rates low, but banks have sharply stepped up their commercial lending this year.

In fact, as Stephen Bollenbach, Disney’s chief financial officer, said in an interview with CNBC on Monday, part of the reason for the timing of the deal is that this is the most friendly credit environment he has ever seen.

“If we borrowed $10 billion, we could pay it all back from the cash flow of our business within five years or so,” Bollenbach said.

Disney, considered conservative in finance, has shown some creativeness in the past in taking advantage of a favorable credit climate. For example, in the fall of 1993, it startled Wall Street by floating $300 million worth of bonds with the extraordinary maturity length of 100 years.

Investors snapped up the so-called Sleeping Beauty bonds, and Disney locked in a rate of 7.55% for a century to come.