Fitch Equipped to Take on Rivals After Hearst Boosts Stake

(Bloomberg) -- Hearst Corp. acquired the 20 percent share of Fitch Group Inc. it didn’t already own in a move that could help Fitch’s credit ratings business compete with larger rivals.

The publishing and media company boosted its ownership in Fitch to 100 percent in a deal valued at $2.8 billion, according to a statement Thursday. Hearst’s investment gives Fitch more sway to compete with S&P Global Ratings and Moody’s Investors Service, the two largest credit raters, according to Dan Dolev, an analyst at Instinet LLC.

"It gives them a bigger backing, and more opportunity to grow and invest and threaten the competition," Dolev said by phone. It also helps Fitch diversify into other business areas if rating bonds becomes less profitable, he said.

Ratings companies have rebounded in the decade since the financial crisis after facing heavy criticism for giving inaccurate ratings on mortgage-backed securities to help win business. They’ve been chasing new acquisitions and opportunities amid expectations the sustained boom in bond issuance and demand for ratings will decline as economic conditions start to sour.

Representatives for Fitch and Hearst declined to comment.

Strong Earnings

Surging bond issuance and the rise of passive investing have driven strong earnings at ratings firms, as buyers rely on ratings of securities and sectors to invest, Dolev said. Still, rising interest rates and market volatility could damp ratings demand, according to Dolev.

“It’s not as good of a business as it used to be,” he said. “Every time there’s volatility in the market, issuance just dies.”

Hearst bought a stake in Fitch in 2006 and increased its share to 80 percent in 2015. Fitch, with business in more than 30 countries, also provides credit-market data, risk analysis and training. More than 20 percent of the company’s revenue in recent years has come from data products outside of ratings, according to the statement.

Hearst had $10.8 billion in revenue in 2017 and turned a profit for the seventh year in a row. The Fitch deal is part of the publisher’s effort to diversify as newspapers and magazines face an uncertain future, with advertising and circulation falling as readers move online. Hearst owns stakes in cable networks like ESPN, more than 30 local TV stations, newspapers including the Houston Chronicle and magazines such as Cosmopolitan.

The closely held company is also spreading into areas that have little to do with media. For instance, Hearst also owns a group of medical information and services businesses.

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