Broadcast companies spent about $10B last year for TV stations — and the acquisition spree will continue in 2014 with help from the two big rivers of cash, Moody’s Investors Service says in a report out this morning. “Larger broadcasters will make selective acquisitions or station swaps in 2014 to expand their footprints in key markets” while small and mid-sized players “will combine to further build scale and keep up with their larger peers,” writes Senior Credit Officer Carl Salas. The debt rating service predicts that political ad spending could hit $2.6B this year. Those spots plus ones tied to the Winter Olympics will boost revenues as much as 16% while the underlying market for TV station commercials will increase as much as 3% with strength in automotive and retail. Insurance companies, health care providers, and state and local governments could spend as much as $700M on messages related to the new Affordable Care Act. Meanwhile, revenue from retransmission consent deals with cable and satellite companies will increase 20% this year. All told, revenues for pure-play TV broadcasters could hit nearly $133B, including $90.5B from core ad sales and $22.2B from retrans agreements. “Broadcasters will issue new debt to finance acquisitions in 2014 and beyond, but their stronger balance sheets will help offset the higher debt burden,” Salas says.
If you think cable companies already have too much power, just wait. Over the next five years or so the industry “will consolidate to around 3-4 dominant cable operators, which will have sizeable footprints,” Moody’s Investors Service SVP Neil Begley says in a report today. The big guys will start to snap up smaller operators, and swap systems, because it will help them compete with phone companies to attract business customers. “Business services, primarily including voice and data, will be the largest single growth driver for cable over the next decade as residential services growth stagnates,” Begley says. Commercial customers soon will spend about $80B a year for voice, video, and Internet, and cable operators just collected $7.5B from them last year. But cable has a problem because operators’ systems “are like a jigsaw puzzle of efficiency customized to serve the residential customer” but are “inefficient or insufficient to serve multi-location commercial customers compared to most telecom competitors.” The problem is especially acute for mid-sized companies including Cox, Charter, and Cequel Communications, forcing them to choose to be either buyers or sellers. Comcast may have to sit out the consolidation wave “given the regulatory scrutiny it already faces as the largest U.S. cable operator.” But Time Warner Cable “has substantial financial flexibility” to buy.
The rating service followed through today on the path it hinted it would take in March when it put Lionsgate‘s debt under review. It only delivered a small bump: Lionsgate’s corporate family went to B1 from B2 — which means it’s still considered speculative. That’s due in part to “the inherent high risk and typical low margins associated with the film production business and the mixed performance of Lionsgate’s film slate in recent years,” Moody’s Investors Service says. Still, its analysts say that the success of The Hunger Games “has significantly improved the company’s cash flow generation and de-leveraging prospects.” In addition, the acquisition of Summit Entertainment “has been credit positive for the company from both a strategic and financial standpoint.” It will “help diversify Lionsgate’s revenue stream by adding the successful Twilight franchise to its current portfolio, and result in significant cost savings from overhead reduction and marketing and distribution synergies.” Moody’s notes that Lionsgate’s 31.2% stake in EPIX can contribute now that it “generates free cash flow and does not require additional investments from the company as it did a few years back.” Debt holders also would benefit if Lionsgate unloaded its 51% interest in the TVGuide Network, “which it has shown strong interest in selling over the past year.”
About $165M worth of debt could be affected by the review, which follows this week’s agreement by a group led by Guggenheim Partners to buy the production company. Moody’s Investors Service says that it’s watching to see whether the transaction “results in a material increase in debt” without an improvement in cash flow. The debt rating firm also wants to be sure that all’s well with Dick Clark Productions‘ major sources of cash: annual shows from the Golden Globes, the American Music Awards, the Academy of Country Music Awards, and Dick Clark’s New Year’s Rockin’ Eve, and the Fox series So You Think You Can Dance. If any of the shows are cancelled, and there’s no replacement, then it could “materially impact operating performance,” Moody’s says. Dick Clark Productions has a B2 rating, which means investors who own its debt are taking a high risk. Moody’s says that reflects the company’s substantial borrowing — equal to 5.9 times its estimated EBITDA leverage — as well as its modest size and courtroom battle with the Hollywood Foreign Press Association over the rights to the Golden Globes.
Owners of media company bonds shouldn’t worry when they hear executives talk about returning cash to stockholders. The industry is no longer obsessed with mergers and big investments, much of which used to be paid for with debt. As a result, cash flow “has exploded”, Moody’s Investors Service SVP Neil Begley says in a report today. Even when companies repurchase shares and raise their dividends — things that stockholders love — they will “stop short of levering up” according to the debt rating firm. Begley based his conclusions in part on a study of 25 media companies’ fiscal policies over the last 10 years. He discovered that free cash flow grew an average of 10% a year, even as the percent of cash flow that went to shareholders rose. The companies had $35B last year vs an average of $24B from 2002 to 2008. With the economy improving “we expect (stock) repurchases in 2012 and 2013 will exceed pre-recession peaks of over 100% of free cash flow.” That will stop, of course, if the economy turns south again, Moody’s says.
The debt rating service says that bond holders have no need to fear the fallout from a parliamentary report yesterday that says Rupert Murdoch’s handling of the UK hacking scandal made him “not a fit person to exercise the stewardship of a major international company.” The media and entertainment giant’s “significant cash balance and strong free cash flow generation mitigates the uncertainty of additional financial fallout from the phone hacking scandal,” Moody’s Investors Service concluded today. News Corp has a strong Baa1 senior unsecured rating; it generates about $2.5B a year in cash and had $9.4B in its coffers at the end of 2011, equal to more than 60% of its $15.5B in debt. Moody’s says that after “cutting through the highly politicized hyperbole” it concluded that News Corp can “mitigate potential costs” from the scandal. The report from the Culture, Media and Sport Committee “represents an opinion without any direct regulatory implications.”
Actually the debt ratings service projects an “advertising windfall” for virtually all traditional media in a report this morning that says auto makers will sell 14M vehicles this year, up 9.3% vs 2011. That should especially delight TV execs, according to the Moody’s Investors Service report: Last year auto companies spent $13.9B on ads, and accounted for as much as 25% of sales on cable systems, 23% for TV stations, and 12.5% for broadcast TV networks. With auto sales following improvements in the overall economy, broadcasters should enjoy ”strong – perhaps even record-high – upfront sales this year,” says the report’s lead author, Neil Begley. “We expect the scatter market to be even stronger in the latter half of 2012, as new-car launches coincide with peaking political ad spending ahead of the November US elections.” As a result, he says, TV networks likely will “hold above-average levels of inventory after the upfront to take advantage of even better and potentially record price levels in the second half of the year.” The biggest beneficiaries in Big Media will be CBS, which derives about 63% of its revenues from ad sales, followed by NBCUniversal (36%), Viacom (34%), and Time Warner (21%). Disney and News Corp “are the most diversified of the media conglomerates and will therefore be the least affected by growth in auto ad spending,” Begley says.
The debt rating firm strongly hinted that it will upgrade Lionsgate’s B2 debt rating, which would mean that the company could pay lower interest rates on the cash it borrows: The $150+M domestic opening for The Hunger Games “will likely have strong implications for the success of the remaining three films in the franchise,” Moody’s Investors Service SVP Neil Begley says. “While we had strong performance expectations for the first film in the series, the actual performance materially exceeded those expectations, and positions the company well in the current review for upgrade.” Lionsgate bulls are stampeding today as its stock price hovers around 15.23, +4.8%, in mid-afternoon trading. If that holds, it would be slightly shy of the all-time high closing price of $15.68 hit last week.
The debt rating company says that several broadcasters who have taken Aereo to court probably will defeat its new effort to sell customers a streaming service for over-the-air signals. The courts will agree with the plaintiffs who say that the effort violates their copyrights. Aereo says that it’s just offering remote access to the kinds of services consumers can already get at home using an antenna, DVR, and a Slingbox. If Aereo were to prevail, Moody’s Investors Service says, then it would be a serious blow to some of the media business’ largest companies. It could undermine broadcasters’ ability to demand retransmission consent payments from pay TV providers. (Why should they pay if Aereo can retransmit local station signals for free?) And if lots of people liked Aereo’s $12 a month service — which also offers the ability to record up to 40 hours of programming and replay it on demand, much like a DVR — then “it would also jeopardize (broadcasters’) advertising revenue.” Ratings services including Nielsen ”do not currently have the capability of capturing online viewing accurately.” Cable has less to fear
Movie theaters face a lot of problems but competition from premium VOD probably won’t be one of them, Moody’s Investors Service says in an industry report today. The debt rating company says that studios probably will continue to wait more than four months before offering new films to cable and satellite VOD “because it is in their economic interest to do so.” For example, they depend on theaters to show trailers for the studio’s upcoming films. Also, any decline in box office sales could affect the whole value chain including home video sales and pay TV deals. Theater owners will find little else to cheer in the report. It says that the movie business is “mature and business risks are increasing” as consumers spend more time playing video games and surfing the Web. And 3D “isn’t a cure, although some 3D features will continue to draw crowds at premium prices.” The bottom line: “movie theater owners might need to rethink their longstanding complacency with high debt levels and shareholder-friendly policies to maintain their debt ratings.”
The 2012 election campaign has barely begun, but broadcasters can expect to see “an unprecedented frenzy of political advertising,” with total sales running as much as 18% higher than the $2.3 billion spent in 2010, Moody’s Investors Service says in a report today. The U.S. Supreme Court has tossed out spending caps for corporations and unions, making this the first presidential election in more than a decade without such limits, the research firm says. “The campaign frenzy will get some of its oxygen from high-visibility headline issues, including a weak domestic economy, high unemployment and a continued slump in real estate,” Moody’s says. “Control of Congress is also in close contention.” Republicans “may possibly view the Senate to be within their reach in 2012.”