Credit Crisis Hits Media Companies as Some Deals Slump
Media companies are feeling the credit crisis, industry executives said: Deals are up in the air and banks are tightening access to loans. Broadcasters face an additional threat to advertising revenue, and deals to buy and sell radio and TV stations are in a major slump, they told us. Cable, broadcast and other companies not seeking loans or investments are in much better shape than those needing money, media executives said.
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Rejection by the House of a $700 billion financial industry bailout Monday (CD Sept 30 p3) has added to the financial gloom, said Gray TV President Bob Prather and others. It’s nearly impossible for most companies, even those in good financial shape, to get credit lines or other bank financing, Prather said. “There’s no bond market at all. There’s no bank market at all.” Congress should take action because “a sound banking system is important” to everyone, he said. Congress is expected to try again on legislation Wednesday.
Media companies that depend on debt for day-to-day operations will struggle, HDNet Chairman Mark Cuban said. “If a company is living on renewable debt, they are in trouble,” he said. “Their costs are going up and they risk getting shut out completely.” Companies that have avoided taking on debt or limited their leverage should be fine apart from an industrywide slowdown in ad sales, he said.
Most broadcast deals are “totally on hold” and no financing is getting done because financiers are reluctant to lend until there’s more clarity from Washington, Prather said. “Even deals that were announced earlier, I think most banks are putting off closing anything.” Broadcasters’ business may be hurt if more advertisers pare spending as the auto industry has, Prather said: “It’s as bad as I've ever seen the financial market” in 16 years in broadcasting.
The apparent swoon in stations changing hands appears to be the worst since the late 1980s, when banks scaled back lending to highly leveraged companies under pressure from Congress and regulators, appraiser David Schutz said. He’s getting few calls from his financial institution clients to estimate the value of properties. “The quiet is deafening,” Schutz said, indicating that the market for station sales is “frozen.” On the other hand, banks aren’t asking him to appraise struggling stations in preparation for “workouts,” added Schutz. “I think the entire marketplace is not certain which end is up right now, and that’s really a reflection of the national if not the worldwide economic situation and is not industry specific.”
The deal market isn’t frozen but has become highly selective, said Frank Kalil, whose firm SNL Kagan said was the most active broadcast broker in the first half of 2008. “You have to be the most creditworthy in order to get debt and in order to get equity you have to have the best looking deal,” Kalil said. Marginal deals aren’t moving forward, but stronger ones are, he said. “The larger the deal, the more people are involved in the decision making. The bigger the committee, the less likely the fruition.” The broadcast market has seen worse times, despite slumping stock market prices, and eventually the situation will return to normal, Kalil said. “The people who were buyers yesterday, the people who were bankers yesterday, the people who were brokers yesterday will be doing the same thing tomorrow … I just don’t know when tomorrow comes.”
‘Tighter’ Credit to Continue
“Credit will no doubt be tighter for some time,” Bresnan President Jeffrey DeMond said. “Those that need to borrow will face potentially serious challenges until the current situation is resolved and liquidity is restored throughout the system.” But the cable operator is in good shape because it refinanced last year before the “current dislocation began to grip the bank market,” he added. Gray TV also is on solid financial footing because it has a $100 million unused credit line, said Prather.
Although it’s hard for some telecoms to raise funds, large carriers like AT&T and Verizon with positive cash flow still can handle big mergers and acquisitions, said Zacks Investment Research David Weissman. He said he sees no slowdown in telecom consolidation. The pending purchase of Alltel by Verizon worth $28.1 billion won’t be affected by the credit crisis, he said. Medium and small telecom companies may have trouble making acquisitions, said Weissman. The equipment sector is the hardest hit among telecom companies, he said.
There still are “compelling opportunities” in telecom, driven by growth in certain areas, said Matthew Rubins, a partner at MC Venture Partners. Significant value can be unlocked by acquiring neglected fiber facilities and bringing in strong management and new technology, he said. Another investment area is managed services, when a service provider takes on responsibility for IT functions. Enterprises have become significant consumers of managed services, fueling strong demand, Rubins said. Wireless providers with new mobile phone business models -- offering unlimited, flat-rate wireless services with no signed contract -- can profitably sign up subscribers with low incomes, presenting growth opportunities, he said.
Some media stocks rebounded Tuesday after Monday’s market plunge. Comcast added 8 percent, Liberty Global gained 6 percent, Viacom rose 5.3 percent and Disney was up 3.7 percent. But not all media sector stocks got the same lift that boosted the Dow Jones Industrial Average, Nasdaq and S&P 500 indexes by more than 4 percent apiece. Emmis shares fell 18 percent and closed below $1 for the first time. Nexstar shares slumped 22 percent and Charter stock fell 11 percent, Discovery fell 4.5 percent and LIN TV dropped 4.3 percent.