While large-cap public companies are beginning to find their way to making acquisitions, privately-held companies, especially those in the media business, are finding it extremely difficult to engage in transactions. Here is the problem: Many broadcasters are in what I have termed “the box.” They have, by yesterday’s standards, a reasonable debt load which they can still service with today’s cash flow. However, both valuation multiples and cash flow have declined so that the owner has little paper equity in the business.
So what is an owner to do? There’s no point in selling now; he’ll get next to nothing, or less. He can’t deleverage by raising equity because there is no way to achieve an equity return on that investment. He can’t refinance. There are few institutions lending in the middle market now, and in any event, no lender today will contemplate new loans at the leverage ratios that most companies currently have in place. And even if such a loan were possible, it would be at dramatically higher interest rates.
Hence, the only course of action is to manage the business well, focusing on basics. With the economy and advertising revenues picking up a bit, the key objective is to improve cash flow as much as possible. That’s always a worthwhile strategy, but especially important in these times. He may need the forbearance of the lender to allow him to execute this plan, but the lender is in the box also. Over the course of the next year or two (or three), some principal will be repaid and cash flow should increase, bringing the debt to cash flow multiple down to a better level.
Many other companies/industries face exactly the same issues. The biggest risk is that interest rates increase, resulting in diminished ability to stay within covenants, service debt and pay down principal. In my opinion, this is a significant reason why the Fed has kept rates low.
So where does this lead? From a transactions standpoint, not much this year. Assuming the owner achieved decent operating results in 2010, and 2011 is also a good year, then I can see transactions beginning to resume in force around the beginning of 2012. Some finance companies may be able to undertake the deals late this year. Banks will need to see a second solid year of financial performance leading into what should be a strong year for broadcasters with the 2010 elections. The combination of these factors should allow the transactions market to resume.
–David Abraham is Managing Director of DAC Media Capital (www.daccapital.com), specializing in middle-market transactions for private companies throughout the media industry.
