Analysts ponder media industry's next victims
NEW YORK (Hollywood Reporter) - Media giant Tribune recently filed for Chapter 11 bankruptcy protection and Sumner Redstone's National Amusements theater chain violated a debt covenant. The moves beg the question: Who, if anyone, could be next in the broader media and entertainment industry?
The global financial crisis has made debt harder to access and more expensive, leaving Wall Street wondering who might run into trouble -- and even file for bankruptcy -- in 2009.
Besides newspaper companies, Charter Communications, the cable operator controlled by software billionaire Paul Allen, is high on people's lists of concerns.
The St. Louis-based company has long been the most indebted major cable firm, with net debt of slightly more than $21 billion as of September 30, and it has said that it might need to go into bankruptcy to deal with that burden.
President and CEO Neil Smit has focused on boosting revenue and operating cash flow, but to survive under its debt pile Charter has refinanced and extended its maturities every year since 2004.
"Charter is surviving by using debt exchanges to push back maturities," Gimme Credit analyst Shelly Lombard said in a recent report. "Even at the current revenue growth rate, Charter won't be able to grow into its capital structure." She predicts that the company might need to sell "a considerable amount of assets to avoid bankruptcy."
Just before Christmas, Charter said it asked longtime financial advisor Lazard to start talks with bondholders to boost its financial flexibility.
Other ratings agencies also suggested that bankruptcy might be the only way for Charter to work out its debt problems.
"The complexity posed by the company's multiple creditor classes may render an in-court restructuring process as the more likely format for resolution," Moody's Investors Service said.
And Citi Investment Research analyst Jason Bazinet this week said that the Lazard hiring, as well as recent Charter board resignations, are signs of increased pressure following the financial crisis.
"In the current credit environment, planned negotiations with a diffuse set of bondholders with varied interests might not be successful given the company's significant liquidity needs and need to refinance 2010 maturities," he wrote in a report. "(The) likelihood of financial distress rises to 75%, versus 20% under our prior view."
A perhaps more surprising company whose liquidity has come into focus is Univision Communications.
The Spanish-language media giant, led by CEO Joe Uva, had been growing at a nice clip, but the decline in auto advertising -- the company reported a 25% drop in the category during the third quarter -- has reduced revenue and cash flow momentum, and the credit crunch and declining valuations across the industry have hurt an attempt to raise $500 million in asset sales. It also carries a lot of debt after its buyout last year by private-equity firms Thomas H. Lee Partners (also an investor in Nielsen, The Hollywood Reporter's parent company), Texas Pacific Group, Madison Dearborn Partners, Providence Equity Partners and media mogul Haim Saban.
Credit analysts also have concerns that a legal battle with longtime content partner Televisa will come to a head in 2009 and could further weaken Univision.
As a result, some have drawn comparisons between Univision and Tribune, which also was taken private at the height of the private-equity buyout boom, though some highlight Univision's stronger growth rate. But the market that has produced more than one major surprise in recent months, and there are concerns about Univision's liquidity.
Importantly, a $500 million debt payment -- specifically a so-called asset sale bridge loan -- comes due in March. The company is expected to pay it off by tapping into additional funding sources beyond the small proceeds of $153 million -- half of what had been expected -- from the sale of its music arm.
"Things are not turning out as expected" for Univision and its investors, Gimme Credit's Lombard said in a recent interview. "Earnings growth is not as hoped." Although she doesn't quite expect a bankruptcy filing, she predicts that the company "will limp along until the economy recovers," or until a Televisa ruling brings a positive or negative impact.
Standard & Poor's credit analyst Heather Goodchild also believes that Univision's recession-challenged operations will have a harder time providing liquidity given the firm's debt load.
"The debt taken on is an extremely onerous burden," she said, arguing that 2009 will be tight for Univision.
Moody's also has issued warnings, including in a pre-holiday-season debt-ratings downgrade on the company, its second of 2008.
Because the sale of Univision Music Group raised less than expected and the firm delayed radio station sales, Moody's analyst John Puchalla argued that "asset sales are unlikely to improve credit metrics significantly."
Overall, he believes that Univision "has only adequate liquidity through the end of 2009," even though cost savings and retransmission-consent revenue should provide a positive counterweight to what the analyst predicts will be an ad revenue decline of 10%-15% in the new year.
Meanwhile, Univision itself is bullish on its outlook going into 2009.
"Univision has more than ample liquidity to operate the business in the current environment and has sufficient cash on hand to meet all obligations and debt maturities including repayment of the asset sale bridge due in March 2009," a spokeswoman said. "There are no other debt maturities until the later part of 2011."
Shutting down money-losing operations and lowering capital spending are key moves media companies can put in place to alleviate financial stress.
Case in point: Cablevision. Investors have been skittish about the cable operator's debt given that $1.7 billion of it matures around the middle of 2009. But the company recently decided to shutter its unprofitable Voom HD networks operation.
Pali Research Richard Greenfield was among the first to laud the move, arguing that Cablevision spent $100 million-plus annually on Voom despite "minimal revenue from the channels."
The Voom decision led some on Wall Street to sigh with relief and suggest that the company, controlled by the Dolan family, will focus its attention and capital spending on core operations to ensure its financial health.
"We believe it has ample liquidity (even if it has no access to the capital markets in 2009), particularly with free cash flow expectations for 2009 increasing," Greenfield wrote in another year-end note. He estimated that Cablevision will have more than $2.2 billion of cash available by mid-2009, including more than $500 million in free cash flow -- more than enough to make its $1.7 billion debt payment.
In addition, Cablevision could "significantly curtail" its WiFi and Madison Square Garden spending in the coming year if necessary, Greenfield said.
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