The recent meltdown in the corporate credit market spells trouble for merger and acquisition (M&A) activity in the media and communications sectors.
On Aug. 3, Nexstar Broadcasting Group, Inc., Irving, Texas, said it has pulled itself off the market after seeking a possible takeover. According to the company, the review process was halted due to poor financial-market conditions. Over the past two weeks, interest rates for corporate debt have inflated, making financing more expensive, while investors in corporate debt have demanded more compensation and more risk-protection. Goldman Sachs was advising Nexstar on its strategic review.
Skittish investors, growing increasingly risk-averse, are putting the pinch on capital. In hopes of drawing investors to their deals, borrowers can increase the rates at which they borrow money. But as financing becomes more expensive, borrowers are less inclined to bring deals to market. Indeed, some are chipping in more of their own money to finance acquisitions.
Earlier this week, CanWest Global Communications scrapped a high-yield bond planned as part of its financing for the $1.5 billion (Canadian) acquisition of the Alliance Atlantis broadcasting assets. In place of the funds from the bond issue, CanWest contributed more equity and secured a bridge loan.
But many don’t even get the opportunity to tap the debt markets. With the investor base drying up, it is difficult for banks to underwrite debt. Many corporate bond and loan deals have been shelved, creating financial traffic jams and stalling some M&A transactions.
The current backlog of deals in the high-yield bond market totals approximately $100 billion, according to Standard & Poor’s Leveraged Commentary & Data. To put that in perspective, total high-yield bond issuance in 2006 was $143 billion. The logjam in the leveraged-loan market is a staggering $200 billion.
Some media and communications companies are sitting in that queue, although financing needs for some are still a way off. Among them: Cablevision, Intelsat, Telesat, Tribune Corp. and Clear Channel Communications.
The constricting debt market is a particularly sensitive issue for private-equity–backed leveraged-buyout (LBO) activity, which is heavily dependent on the bond and loan markets to fund acquisition costs.
Private equity is active in many media outlets and has had a keen eye for broadcasting. Firms are enamored of station owners’ cash-flow potential, particularly from retransmission consents and political advertising for the 2008 elections.
“Private equity was the catalyst for the renewed interest in acquiring stations,” says Mark Fratrik, VP of BIA Financial Network, which provides financial and strategic advisory services.
LIN TV, another station owner that put itself on the market, remains on the block and is getting interest from private-equity shops, but market turmoil may cause delays.
Fratrik notes that, in a credit crunch, it is not surprising to see broadcasters pull themselves off the market and reevaluate in a year or two. That’s because business is good and, while companies see a good opportunity in private-equity bids, for most, the event is not “make or break.”
“It’s not like they’re getting pressure from stockholders,” he says.
Whether market conditions worsen to a point where these deals are not viable remains to be seen, but right now, it’s a stalemate.
Buyers of corporate debt don’t see a better scenario in the near future. A recent survey by Fitch Ratings Service found that a majority of asset managers expect some degree of deteriorating credit conditions in the high-yield and less risky investment-grade markets over the next 12 months. However, 42% see conditions worsening over that span for the media and broadcasting sectors, and 22% see deterioration in telecom and cable.
The poor financing environment may sidetrack private-equity LBO activity, which could provide some strategic opportunities for companies with strong fundamentals and healthy cash positions that are less reliant on the debt markets. Some cable companies fit that bill and are heard to be looking at acquisitions. The bidding for UK cable company Virgin Media was initiated by an offer from private-equity house Carlyle Group, but U.S. cable operators Liberty Global and Time Warner Cable are reportedly mulling bids as well. Time Warner Cable said it is also reviewing the possibility of acquiring the cable system assets of Insight Communications.