The Diversification Debate

Companies continue to stumble over whether, and how, to diversify.

BJ’s rebounded strongly when the market reopened after the attacks, rising 17.5 percent to $51 on October 31, while the S&P 500 rose only 2 percent in the same period. “We like our business model in this environment,” says Forward.

Indeed, BJ’s is no less fortunate than Constellation and Bristol in that its business isn’t cyclical. GE and Disney can only wish the same could be said for theirs.

Higher, Mickey

Credit analysts certainly don’t think The Walt Disney Co.’s diversification is significant enough to outweigh new concerns about its balance sheet. And that means higher financing costs for the company.

Earlier this year, Moody’s Investors Service put Disney on review for a possible downgrade because the company was buying back stock. Six days after September 11, Moody’s reduced Disney’s ratings from single-A-2 to single-A-3 on senior unsecured debt and from P1 to P2 on commercial paper, even though a $1 billion bond offering issued several days earlier helped reduce the company’s dependence on commercial paper. A few weeks later, Standard & Poor’s Corp. followed suit, cutting its ratings from A to A- on Disney’s bonds and from A1 to A2 on its commercial paper.

Although the $1 billion in notes were originally intended to lengthen the duration of Disney’s liabilities, some of the proceeds went instead to buy back 50 million of the 135 million shares that Sid Bass and other members of his family, who had helped the company through its financial difficulties in the mid-1980s, sold in September.

Disney’s cost of capital is rising just as it seeks to finance the acquisition of cable TV operation Fox Family Worldwide, announced last July for $5.3 billion in cash and assumed debt. According to data compiled by Bloomberg News Service, companies with single-A-3 ratings from Moody’s currently pay about 0.21 percentage points more to borrow than do those with single-A-2 ratings. And the cuts in Disney’s commercial-paper ratings to P2 by Moody’s and to A2 by S&P raise its borrowing costs by limiting the extent to which the company’s paper can be held. The biggest investors in commercial paper are money-market funds, but under SEC rules, they can invest no more than 5 percent of their assets in paper rated below the agencies’ top levels. –Ronald Fink

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