Tribune Co’s bankruptcy is a bad omen for the almost $90 billion in buyouts of US media companies from 2005 to 2007 that relied heavily on borrowed money and economic assumptions that proved too optimistic.
Already, some bonds of radio broadcaster Clear Channel Communications Inc, acquired in a $17.9 billion leveraged buyout this year, trade at about 16.5 cents on the dollar, while debt of Spanish-language media company Univision Communications Inc, purchased for $12.3 billion in 2007, is around 12 cents. The prices indicate investors are concerned the companies may default, said Larry Allen, managing director of Greenwich, Connecticut-based Nyppex Holdings LLC, which trades interests in buyout funds.
Tribune, acquired a year ago by billionaire real-estate investor Sam Zell in a buyout that left the company with $12.9 billion of debt, tumbled into bankruptcy as US newspaper advertising sales plunged at an accelerating rate, dropping 18 per cent in the third quarter alone.
“We’re going to see more bankruptcies in leveraged deals that were done at high prices in the past two or three years,” said Brooks Zug, senior managing director of HarbourVest Partners LLC in Boston, which invests in private equity. The acquisitions most at risk are “consumer-oriented and deals that had covenants on borrowing.”
Between 2005 and 2007, 282 US media deals valued at $89 billion were announced in transactions where companies were taken private, or involved in a management or private- equity buyout, according to data compiled by Bloomberg.
Buyout firms will likely extend their writedowns to 40 per cent to 80 per cent of the value of their media acquisitions, said Allen.
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Scott Sperling, co-president of Boston-based Thomas H Lee Partners LP, one of the Clear Channel buyers, and Chuck Dohrenwend, a spokesman for Madison Dearborn Partners LLC in Chicago, which participated in the Univision purchase, declined to comment on Allen’s estimates.
Michele Clarke, a spokeswoman for Clear Channel, declined comment. Brooke Morganstein Gordon, a spokeswoman for Univision, said the company 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.”
Zell’s $8.3 billion Tribune purchase in December 2007 came at the tail end of leveraged-buyout boom that was squelched by the collapse of the US mortgage industry in July 2007. Zell eliminated jobs and sold assets including the Long Island, New York, newspaper Newsday to cope with Tribune’s debt load and declining revenue.
The December 8 bankruptcy filing by 161-year-old publisher of the Los Angeles Times and the Chicago Tribune was necessary to “save the business,” Zell said.
US advertising spending in the third quarter dropped 4 per cent even with election campaigns and will likely fall 6.6 per cent in the last three months of the year, Sanford C Bernstein & Co analyst Michael Nathanson said in a November 14 report. Ad spending will shrink 9.3 per cent next year, more than this year’s 6.7 per cent drop, Nathanson said.
Lee and Bain Capital Partners LLC of Boston agreed in November 2006 to acquire San Antonio-based Clear Channel, betting they could cut costs and halt a slide in radio advertising caused by listeners’ migration to the Internet, satellite radio and iPods.
The Clear Channel deal, which closed for about 12 times earnings, is now worth about half that, said Jake Newman, a media analyst at CreditSights Inc in New York. The values of radio and outdoor-ad companies fell to an average of 7.3 times earnings in October from 10.6 times earnings in August 2007, according to a report by Credit Suisse Group.
“The deals that got done were a function of plentiful credit at attractive rates and that more than anything drove multiples,” said Peter Kern, a managing partner at InterMedia Partners LP, a private equity firm in New York that invests in media companies.
Madison Dearborn and Lee in March 2007 backed the buyout of New York-based Univision along with Providence Equity Partners Inc, TPG Inc and billionaire Haim Saban.
Univision said November 17 that adjusted profit for the third- quarter fell 2.7 per cent. Univision may not be able to cover its interest expense on loans, said Shelly Lombard, an analyst at Gimme Credit. Publications Inc in Montclair, New Jersey.