Media companies dumping their debt

Debt-free is the new black among Australian media companies.

By InvestSMART · 17 Dec 2012

By InvestSMART ·
17 Dec 2012

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Debt-free is the new black among Australian media companies.

DEBT-free is the new black among Australian media companies that are waking up to the fact that a strong balance sheet is needed in an environment where no one can see an end to the advertising doldrums.

Rupert Murdoch started the trend in June when he announced that the publishing side of the News Corp spin-off (which will retain the name) will be debt-free to give the challenged business a leg-up.

He will also sneak in News Corp's half-share of pay TV provider Foxtel to bolster the business, but that's another story.

Fairfax Media, owner of The Age, is taking another route - selling the remainder of its prized digital business, New Zealand's dominant online auction group Trade Me - to pay down its debt to negligible levels.

Fairfax had net debt of $815 million as of June 30 - excluding Trade Me's debt - and the expected $600 million sale will add to the $80 million raised from the sale of a US business last month.

In a tough environment, Fairfax will have the balance sheet to support its restructure and look at further acquisitions in the digital space that fit its needs. A prized bauble it may have been but the truth is that Trade Me is not an integral part of Fairfax's media business - as many potential predators are no doubt aware - and its current price is irresistible. The company trades somewhere above 20 times its forecast earnings for this year, Fairfax is trading around 8.5, according to Bloomberg data.

If selling an asset such as Trade Me in the current environment sounds like a tough decision, spare a thought for Ten.

The embattled broadcaster has been forced to undertake its second capital raising in six months - with its stock trading at record lows - in order to wipe out its debt worries. What remains are concerns about its operational performance.

Questions are also being raised about the need for APN News & Media to follow suit after a massive profit downgrade last week raised questions about its ability to remain within its debt covenants.

Nine Entertainment may not be getting the clean balance sheet it was hoping for when a capital restructure was announced in October but as a private company protected from an unforgiving sharemarket its need probably isn't as great as the listed stocks.

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Frequently Asked Questions about this Article…

Why are Australian media companies trying to become debt-free?

Many Australian media companies are aiming to cut or eliminate debt because advertising revenues remain weak. The article explains that a strong balance sheet gives media businesses more flexibility to restructure, invest in digital opportunities and survive an unpredictable ad market.

How is News Corp making its publishing business debt-free?

Rupert Murdoch announced that the publishing side of the News Corp spin-off (which will retain the News Corp name) will be set up debt-free. The move is intended to give the challenged publishing business a financial leg-up as it faces tough trading conditions.

What does Fairfax selling Trade Me mean for Fairfax shareholders and debt levels?

Fairfax expects to sell the remainder of Trade Me for about $600 million and will combine that with roughly $80 million raised from a recent US business sale. Fairfax had net debt of $815 million as of June 30 (excluding Trade Me’s debt), and the expected proceeds are intended to reduce that debt to negligible levels and support Fairfax’s digital restructuring.

Is Trade Me a core part of Fairfax’s media business and how is it valued?

According to the article, Trade Me isn’t considered an integral part of Fairfax’s core media business, which makes it a logical asset to sell. The piece notes Trade Me is trading above 20 times forecast earnings this year, while Fairfax’s own multiple is around 8.5 (Bloomberg data).

Why did Ten undertake another capital raising and what does that mean for investors?

Ten was forced into its second capital raising in six months to address debt concerns after its stock hit record lows. While the raisings are aimed at wiping out debt worries, the article warns that operational performance remains a key concern for Ten’s future prospects.

Should investors be concerned about APN News & Media’s ability to meet debt covenants?

The article flags that a recent massive profit downgrade at APN News & Media raised questions about whether the company can remain within its debt covenants. That downgrade has prompted observers to wonder if APN will need to follow other media firms in reducing leverage.

What’s the situation with Nine Entertainment’s balance sheet after its capital restructure?

Nine Entertainment’s October capital restructure may not have produced the fully 'clean' balance sheet it hoped for. The article notes that because Nine is privately held, it’s more insulated from a harsh sharemarket reaction, so its immediate pressure to be debt-free may not be as great as for listed peers.

What general lessons should everyday investors take from media companies dumping debt?

Everyday investors should note that reducing debt can make media companies more resilient in a prolonged advertising downturn. Common approaches include asset sales (like Fairfax selling Trade Me) and capital raisings (as with Ten). However, lower leverage doesn’t remove the need to assess underlying operational performance and long-term digital strategy.