Borrowing Just Got Harder

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Many media companies are literally writing off their chances to spend their way out of their slumps.

The financial handcuffs restricting many media companies' flexibility are getting tighter as several firms are suddenly reporting a succession of non-cash write-offs on slices of their asset bases. It's more than just another sign that traditional media including TV stations face falling valuations: it makes potential turnaround plays such as borrowing to fund acquisitions even tougher.

Lenders react negatively because write-downs lower so-called book values of companies that are often a benchmark used to set credit limits. With lower credit ceilings, TV companies will have less borrowing capacity to make purchases that may make strategic sense, make cash payments to shareholders that prop up share prices or even invest in internal operations.

In just-released second quarter earnings reports, Media General took a $532 million after-tax write-off and LIN TV took a $297 million write-off. Also, Gannett took a $2.5 billion after-tax charge on its newspapers (but not TV stations).

“This is not something that would have ever entered the mind of anyone in the newspaper or broadcasting business in the past 20 or 30 years,” when those media enjoyed constantly growing profits and revenue, says veteran media analyst Hal Vogel. Vogel and others expect more write-offs to come.

The tough times for many U.S. broadcasters are a byproduct of revenue that is flat to down, falling profit margins and stock prices on Wall Street dropping from a benchmark of an 11 times price-earnings ratio a few years ago to a less robust 9 multiple these days.

Companies themselves judge if the earning power of some of their assets is “impaired” and then take a write-off. In general, recently purchased assets are more susceptible to such all-at-once write-downs since they typically carry the highest valuations.

Cable TV and other multichannel operators don't face the same write-off pressures today, given their growth and diversification into high profit margin new businesses such as high speed Internet services.

But Wall Street analysts are less concerned because they constantly evaluate company values against stock prices.

After Wall Street has already pounded down TV broadcasting stocks, “the write-downs show that managements and their accountants have now come to the same conclusion,” says one stock analyst. “Managements are coming out of denial. This is part of the healing process.”

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