Media Companies: Rejigger Your Bottom Line

There will be no bailout for media, entertainment and Internet companies that have not yet taken the full brunt of financial pain inflicted by the credit crisis, consumer-led recession, and the changing economics of the tech transformation.

The federal government's multibillion-dollar bailout of Freddie Mac and Fannie Mae over the weekend and Bear Stearns earlier this year is not the kind of emergency life support that public companies should ever expect or want. It's a giant Band-aid solution that does nothing to treat the source of a festering wound. Such moves provide false security in lieu of harsh realities and harsher solutions.

The issue of borrowing and spending money you can't cover with regularly generated funds is catching up with everyone: homeowners, banks, lending institutions, the federal government and companies. The "futures" market media companies play with Madison Avenue when selling advertising against ratings guarantees three to nine months out is betting on a an economy that will worsen. The deeper corporate spending cuts go this year, the higher unemployment levels, mortgage and credit card balance defaults--and the longer the recovery. Only some of the spending pullback by advertisers and consumers will move to the Internet; the remainder will go nowhere for a long time.

And that brings us to the latest quarterly earnings.

If they have not already, many companies--including advertising and consumer-dependent media, entertainment and advertising ones--are going to begin reflecting more of a financial squeeze on their balance sheets and in their 2009 budget planning.

How much is reflected on their quarterly balance sheets will be a product of write-downs and accounting that--while legitimate--can offer a very different view of reality. One of the major problems for all public companies is a growing dichotomy between operating earnings and reported earnings.

There is an urgently growing skepticism that behind every restated balance sheet, adjusted earnings statement and diminished forecast is a set of persistent numbers and issues that companies hope will go away. No such luck.

Some of those issues include the state of corporate borrowing, existing debt and service terms. The ability to raise new capital, the likelihood of defaulting on loans, and the struggle to rapidly reduce and cover legacy costs is not always obvious. Projecting 2009 revenue growth (or not) and spending will be difficult, given that the cyclical downturn in advertisers and consumer spending is playing against an unprecedented shift to online media.

The solvency of companies in the media and entertainment realm is the focus of a Standard & Poor's report released Monday identifying 41 companies that "are vulnerable to liquidity pressures in a prolonged credit squeeze." It represents a three-fold increase from the 13 companies cited in a similar October 2007 report that also analyzed cash flow, alternate sources of liquidity, bank facility covenant compliance status and potential refinancing risks.

S&P says these companies face a myriad of traps, including shrinking cash reserves, negative discretionary cash flow, asset sales obstacles, near-term debt maturities, lack of access to credit facilities, and covenant compliance hurdles. While costly operational restructuring and reduced capital spending will alleviate some of the problem, some companies will not be able to avoid defaulting over the next two years.

The detailed S&P report expressed concern for short-term debt security options that could result in paralytic long-term leverage for Tribune Co. and Univision, which also will have difficulty relying on asset sale proceeds to service near-term debt maturities. Other media and entertainment companies identified, even if they default, could be "right-sized, re-engineered and properly capitalized" on a new survival path.

Other companies mentioned are small- to medium-sized broadcast companies that will struggle again the tides of digital conversion, advertising dependence, and media saturation. Others are more diversified in content production, publishing, conferences and theme parks. The S&P liquidity pressures list includes Salem Communications Corp., Regent Communications, Barrington Broadcasting, Nexstar Broadcasting Group, Freedom Communications and Gray Television. Media companies with the lowest Triple C+ negative ratings on the list include ION Media Networks, Triple Crown Media and Young Broadcasting, as well as merger partners Sirius Satellite Radio and XM Satellite Radio Holdings.

What the sobering S&P report in the context of the continuing broad market economic angst underscores is the need for all companies to take a grueling, deep dive into their own financial realities. The latest quarterly earnings are a snapshot, much of it involving lower earnings results reported against lower earnings expectations.

A Bernstein Research report reminded us that even the media conglomerates are undergoing further earnings estimates reductions in light of lower domestic advertising growth estimates for this year and in 2009; Viacom, Time Warner and CBS are trading single digits on next year's projected earnings per share. While they may be in a better position to sustain the continuing market malaise, even the media giants will continue to lack financial visibility into 2009. Not knowing what revenue and profit levels they can count on will result in reduced capital spending (even where it is needed), more cost-cutting (even where it shouldn't occur) and more reluctant deal-making (costing more money and problems).

The only bailing media players should be doing is bailing themselves out of the hole they dug based on financial projections, operational strategies and growth plans that have seen better days.

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