“A deeper, wider, and more severe slump is upon us, pressured by discontinuous auto and retail marketing, and lapsing business investment,” says Lee Westerfield at BMO Capital Markets. His revised US ad growth forecast is -1.1% in 2008, and -1.9% in 2009 followed by a revival to +5.0% in 2010. Westerfield sees both radio and TV revenues falling in both ’08 and ’09. In the long-term, he notes that radio and TV franchises are not broken, “but some balance sheets are.”
“Based on current “spot” TV and radio pacings and internet Display ad rates reports, we are now in the middle of an unprecedented advertising downturn in terms of severity and duration. The recovery cycle for this recession will likely be longer than previous recoveries, in part owing to the ad pricing pressure induced by ROI-efficient internet media,” Westerfield told clients. He’s expecting Internet ad growth of 13.1% this year, 12.9% in 2009 and an acceleration to 20.5% in 2010. Even so, that is slower growth than the recent five-year trend line.
But for broadcasting he sees the ad cycle deteriorating into a severe recession. His radio forecast is now -8.2% in 2008, -7.6% in 2009 and a modest gain of 0.2% in 2010.
In television, the analyst projects that the network business will be up 2.5% this year, down 8.7% in 2009 and then up 4.1% in 2010. For the TV station business, the forecast is down 4.3% in 2008, down 15.6% in 2009 and up 12% in 2010.
What does the future hold?
“Broadcast franchises are not being disintermediated rapidly, as some futurists have foretold, but radio and TV balance sheets are being dismembered by a severe recession. As media franchises, radio (we believe) will remain ubiquitously distributed and highly profitable, and TV stations are not likely to see rapid disintermediation (two to four years) as network programming channels only gradually emerge via the internet video markets. Thus, radio and TV franchises will likely emerge as 7x-9x EBITDA assets, necessitating industry-wide de-leveraging and consolidation. Given the timeline for debt covenant step-downs, that process will unfold rapidly over the next two years, if senior lenders wave various change-in-control clauses and if FCC regulators do not tarry. In future years, we think radio and TV broadcasters should carry 2x-3x debt-to-EBITDA, not 5x-8x (plus) as the case stands today,” Westerfield wrote.
That points to a huge financial restructuring of the broadcasting business.
RBR/TVBR observation: Westerfield is no doubt correct that balance sheets will have to be improved via industry-wide de-leveraging and consolidation. What remains to be seen is where the strong will find capital to acquire the weak and whether new players with deep pockets will become major entities. Look for some familiar names to be consigned to the history books in the coming years. But which ones? Remember: It is the Strong and Innovative that survive and grow.
