DBRS Upgrades The Walt Disney Company to A (low)

Dominion Bond Rating Service (“DBRS”) has today upgraded the rating of The Walt Disney Company (“Disney” or the “Company”) to A (low) from BBB (high). The trend remains Stable.

The rationale for the upgrade is simply the dramatic turnaround of Disney’s ABC Television Network (“ABC”) over the past couple of years. ABC has become one of the highest rated television networks with creative and unique programming that has enabled it to carve a niche position in conventional television. Hits include Desperate Housewives, Lost, and Grey’s Anatomy. Moreover, DBRS believes that these programs can sustain popularity as they are in the early stages of programming life cycles.

The underperformance of ABC was one of the major elements constraining Disney’s rating and the profitability of the Media Networks segment. With ABC’s revival, the broadcasting group has generated nearly US$700 million in operating income in the recent 12 months compared with virtually zero for fiscal 2003. This was a key driver in strengthening the Company’s overall financial ratios and increasing EBITDA margins at Media Networks from approximately 12% to 22%. In addition, Parks and Resorts and Disney’s cable channels continued to deliver good EBITDA growth.

From a broader perspective, Disney appears to have greater focus on its brand and leadership in programming content, and is strategically positioning its asset base accordingly. The Company’s acquisition of Pixar for US$7.1 billion underscores its commitment to animation and improves a core competency that has faltered in recent years. In addition, Disney has announced a deal to divest some of its radio stations and launched key ABC programs over the Internet. In DBRS’s view, the Company is well positioned to capitalize on emerging technologies by developing its multimedia platform and leveraging its highly recognized brand names.

DBRS notes that while Disney continues to pursue these endeavours, it maintains discipline toward its balance sheet. A strong balance sheet and robust free cash flow (before working capital) of nearly US$1.7 billion in the recent 12 months has facilitated aggressive share repurchases. While new video distribution outlets offer additional revenue streams, much of this is experimental and the business models are fluid. In addition, piracy of intellectual property and weakness at Euro Disney continue to provide challenges; Disney’s filmed entertainment division has also been volatile.