Time for some clever improvements at Seven and PBL
The Age
Saturday November 7, 2009
ACCOUNTS of Seven Media Group and PBL Media show the businesses may fulfil early warnings that private equity investors could lose their shirts on the multi-billion dollar deals.In late 2006 CHAMP co-founder and veteran private equity investor Bill Ferris warned: "If you buy things at quite uncharacteristically . . . high prices, like public market prices, how do you expect to get private equity returns on that? Well, you better have some very, very clever business improvement to bring to the table, because financial engineering is unlikely to get there on its own."Both deals €” Kohlberg Kravis Roberts buying a 47 per cent stake of Seven Media Group from Kerry Stokes and CVC Asia Pacific eventually buying almost all of PBL Media from James Packer €” were struck in 2006 at historically high multiples.Seven was bought at a valuation of 12.4 times earnings before interest, tax, depreciation and amortisation (EBITDA). PBL Media was bought at a multiple of 11.5 times. The multiples were so high because of the generous amount of debt funding supporting the purchases: Seven's debt level was 7 times EBITDA; PBL Media was eight times.Fast-forward three years and the impact of debt-fuelled buy-outs at the top of the market, followed by one of the worst advertising slowdowns in several decades, is revealed in accounts released this week.While both report they are within their covenants, both businesses are groaning under reported debt loads that are either increasing (Seven) or staying roughly stable (Nine).Businessday understands banking syndicates that funded the loans are relaxed about the current repayments, in part due to strong operating cashflows from the businesses. But on simple financial metrics, the businesses closed out the 2009 financial year with key indicators in red-line territory.On a measure of whether their earnings are covering required interest payments, both businesses record ratios of close to one. This means for every dollar of EBIT earned, the business pays out a dollar on interest bills. In short, one is not a great EBIT-interest cover ratio and many funds insist on a minimum coverage ratio of three. (This ratio is only above one because the calculation for both vehicles does not include unpaid interest amounts accruing on the balance sheets).Similarly, the businesses' liquidity ratio €” a measure of current assets against current liabilities €” shows ratios close to one. This means for every dollar of assets that are readily available, there is about one dollar of liabilities that need to be repaid within a year. Again, a ratio greater than one is generally smiled upon.Both Seven and PBL Media are banking on operating profits bouncing back from current levels to pay the interest on their loans and dramatically improve the value of their businesses.But PBL Media is hardly bullish about what is in store for its television businesses, predicting an advertising market decline in 2009-10 and a similarly glum forecast for magazines.Financial engineering has not worked so far. Bring on the clever business improvements €” or a debt restructure.
© 2009 The Age