Tune in for the next episode of their mad, sad world
Sydney Morning Herald
Saturday November 7, 2009
Having changed hands for billions of dollars three years ago, the television companies are now groaning under piles of debt, writes Stuart Washington. Accounts of Seven Media Group and PBL Media show the businesses may fulfil early warnings that the private equity investors could lose their shirts on the multibillion-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."Kohlberg Kravis Roberts bought a 47 per cent stake of Seven Media Group from Kerry Stokes, and CVC Asia Pacific eventually bought almost all of PBL Media from James Packer.Both deals 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.The multiples were so high because of the generous debt funding supporting the purchases: Seven's debt level was 7.5 times EBITDA; PBL Media was eight times.Fast forward three years. The accounts released this week reveal the impact of debt-fuelled buy-outs at the top of the market, followed by one of the worst advertising slowdowns in several decades.Both report they are within their covenants yet they are groaning under reported debt loads that are either increasing (Seven) or staying roughly stable (Nine).Weekend Business understands banking syndicates that funded the loans are relaxed about the current repayments, in part due to the businesses' strong operating cashflows.On simple financial metrics, however, they ended 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 nearly 1:1 €“ for every dollar of EBIT earned, the business pays out a dollar on interest bills.This is not a great EBIT-interest cover ratio €“ any lower and you cannot pay your annual interest bill €“ and many fundies insist on minimum coverage of 3:1. (In both companies, the calculation does not include unpaid interest amounts accruing on the balance sheets.)Similarly, the businesses' liquidity ratio, the measure of current assets against current liabilities, is also nearly 1:1This means for every dollar of assets that are readily available, there is about a dollar of liabilities that need to be repaid within a year.Again, a ratio greater than one is generally smiled on €“ there are more readies to meet the bills as they come in.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. The forecast for magazines is similarly glum.Financial engineering has not worked so far. Bring on the clever business improvements €“ or a debt restructure.
© 2009 Sydney Morning Herald
Share This