Canwest's Debt ($3,715,057,000) Challenge by Grant Robertson
Source : Globe & Mail
With slumping ad revenue and a swooning share price, there are questions about how debt will be repaid - and the clock is ticking
November 14, 2008
When Izzy Asper was on the brink of buying Conrad Black's newspaper empire in the spring of 2000, the founder of CanWest Global Communications Corp. met with his inner circle - his family - and delivered a stirring sales pitch for the deal.
It was a blockbuster transaction that would transform CanWest into the biggest media company in the land. But it had a price tag to match, at $3.2-billion, and would push CanWest's debt load to roughly $4-billion.
No leap of such magnitude would come without sacrifice, though.
"There are sometimes once-in-a-lifetime deals and this is one of them," Mr. Asper explained in a scene recounted by author Peter C. Newman in his new biography of the media mogul, Izzy. "What it's going to mean is you're going to have to forgo other opportunities."
In the years following that deal, CanWest's shares plummeted as concerns about that debt load grew. It took ages for the company to dig itself out, but once more CanWest finds itself haunted by those words.
Now at the helm, CanWest chief executive officer Leonard Asper is in a situation that is a near carbon copy of the one faced by his late father.
The younger Mr. Asper's own career-defining deal, the purchase of Alliance Atlantis Communications Corp. last year, has pushed the company's debt to $3.7-billion, while its shares have fallen to a record low.
The share price, and the company's move to cut costs by slashing 560 jobs this week, have become the public face of CanWest's financial troubles. But those watching the company closely are just as concerned about whether that debt is manageable.
There are six covenants attached to CanWest's debt. Five of them are in good order, but a requirement that the company's total debt not exceed five times its EBITDA (earnings before interest, taxes, depreciation and amortization) has become an increasing concern of late.
At the time of CanWest's last quarterly earnings, the company's debt was 4.36 times EBITDA. Analysts believe that the cushion has become smaller since then and could become even more problematic next year unless the company renegotiates with its banks.
Advertising sales on TV and in newspapers represents 85 per cent of the company's revenue. Any significant erosion in 2009 owing to a recession could force the company to rework its loan agreements at more costly rates, further compounding the situation.
Jamie Wetmore, assistant vice-president at DBRS, is watching ad revenue closely, looking for signs of how bad 2009 could be. "The advertising market in Canada has really gone to hell in a hand-basket very quickly."
A quick fix to the problem would be to sell assets - the favoured course for analysts. However, in a market where there are few buyers, any property would likely fetch a fraction of its value these days. Some analysts believe CanWest could have fetched as much as $1.2-billion to $1.5-billion for its majority stake in the Australian TV network Ten less than two years ago.
However, when no offers were tendered, CanWest took the network off the block. If the company were to sell now, finding buyers would be even harder. Network Ten sits third in the ratings at a time when the Australian ad market is potentially facing its biggest downturn in 40 years, according to Citigroup analyst Digby Gilmour.
When asked two weeks ago if he would entertain thoughts of buying CanWest's stake in the Australian network, Rupert Murdoch called Ten "a disaster zone" that had "limited upside." Harsh words from a rival media owner, but it cast a chill over Ten's shares on the Australian stock market.
Since selling assets is an unattractive strategy, CanWest has no choice but to cut costs in order to keep EBITDA from slipping. As CanWest's vice-president of regulatory affairs Charlotte Bell put it at the Canadian Association of Broadcasters conference in Ottawa last week: There are only two ways TV networks can maintain earnings in a deteriorating market - find new sources of revenue or start slashing costs. "I'm not sure how we're going to get there."
On Wednesday, CanWest took the first steps toward slashing costs, eliminating 560 jobs across its Canadian operations, which represents about 5 per cent of its work force. Few analysts expect CanWest will be the only media company that needs to scale back operations in the coming year, but CanWest's cuts will likely prove the deepest.
The moves will save about $61-million from the company's operating costs, a significant number, but not enough to dramatically alter the covenant problem.
"It addresses the cost side of the equation, which is helpful and may offset some pressure, but it's really the [revenue] issues that will be particularly challenging for 2009," Mr. Wetmore said. "That's what will likely drive EBITDA and covenant headroom during the year."
If Izzy Asper believed some deals require risk and sacrifice, the Alliance Atlantis purchase now fits that bill. Goldman Sachs Group Inc. put up most of the money to help CanWest buy Alliance's 13 specialty channels, which CanWest saw as a strategic necessity to compete with CTV, which owns dozens of them. But CanWest must buy out Goldman's stake in 2011, and the price hinges on the combined performance of its Global TV operations and the Alliance channels.
This uncertainty has pushed CanWest's shares down to levels even its biggest backers had not predicted possible.
Insurance company Fairfax Financial Holdings Ltd. began increasing its stake in CanWest last year, figuring the shares were undervalued.
Fairfax now holds a 22-per-cent stake in the non-voting CanWest shares, and the company is buying up more of the stock at lower prices. That strategy - generally known as averaging down - lowers the exit price for the investor should the shares start to climb again.
"There still seems to be value there," said Paul Rivett, chief legal officer at Fairfax. "And if you can get the same value at a lesser price, it does affect the average cost."
CanWest (CGS)
Close: 80¢, down 5¢
***
How it breaks down
CanWest media inc. (broadcast) $950-million
Limited partnership (newspapers) $1.3-billion
CW media holdings (specialty channels) $797-million
Ten group (australian assets) $616-million
***
Headwinds
The Bank Covenant
CanWest must keep its total debt at no more than five times EBITDA, or face the ire of its lenders. At the end of the last quarter, the ratio was 4.36. But there are concerns about a softening economy in 2009.
Advertising Erosion
A recession, and a subsequent slowdown in consumer spending has all media companies concerned about the impact on advertising revenue. CanWest relies on ad sales for about 85 per cent of its revenue.
Australia
The most decisive fix for CanWest to ease its debt constraints would be to sell assets such as its Australian TV network. Analysts believed the network could have fetched upwards of $1.2-billion less than two years ago. But selling into a down market would bring in smaller returns now.
© Globe and Mail
It was a blockbuster transaction that would transform CanWest into the biggest media company in the land. But it had a price tag to match, at $3.2-billion, and would push CanWest's debt load to roughly $4-billion.
No leap of such magnitude would come without sacrifice, though.
"There are sometimes once-in-a-lifetime deals and this is one of them," Mr. Asper explained in a scene recounted by author Peter C. Newman in his new biography of the media mogul, Izzy. "What it's going to mean is you're going to have to forgo other opportunities."
In the years following that deal, CanWest's shares plummeted as concerns about that debt load grew. It took ages for the company to dig itself out, but once more CanWest finds itself haunted by those words.
Now at the helm, CanWest chief executive officer Leonard Asper is in a situation that is a near carbon copy of the one faced by his late father.
The younger Mr. Asper's own career-defining deal, the purchase of Alliance Atlantis Communications Corp. last year, has pushed the company's debt to $3.7-billion, while its shares have fallen to a record low.
The share price, and the company's move to cut costs by slashing 560 jobs this week, have become the public face of CanWest's financial troubles. But those watching the company closely are just as concerned about whether that debt is manageable.
There are six covenants attached to CanWest's debt. Five of them are in good order, but a requirement that the company's total debt not exceed five times its EBITDA (earnings before interest, taxes, depreciation and amortization) has become an increasing concern of late.
At the time of CanWest's last quarterly earnings, the company's debt was 4.36 times EBITDA. Analysts believe that the cushion has become smaller since then and could become even more problematic next year unless the company renegotiates with its banks.
Advertising sales on TV and in newspapers represents 85 per cent of the company's revenue. Any significant erosion in 2009 owing to a recession could force the company to rework its loan agreements at more costly rates, further compounding the situation.
Jamie Wetmore, assistant vice-president at DBRS, is watching ad revenue closely, looking for signs of how bad 2009 could be. "The advertising market in Canada has really gone to hell in a hand-basket very quickly."
A quick fix to the problem would be to sell assets - the favoured course for analysts. However, in a market where there are few buyers, any property would likely fetch a fraction of its value these days. Some analysts believe CanWest could have fetched as much as $1.2-billion to $1.5-billion for its majority stake in the Australian TV network Ten less than two years ago.
However, when no offers were tendered, CanWest took the network off the block. If the company were to sell now, finding buyers would be even harder. Network Ten sits third in the ratings at a time when the Australian ad market is potentially facing its biggest downturn in 40 years, according to Citigroup analyst Digby Gilmour.
When asked two weeks ago if he would entertain thoughts of buying CanWest's stake in the Australian network, Rupert Murdoch called Ten "a disaster zone" that had "limited upside." Harsh words from a rival media owner, but it cast a chill over Ten's shares on the Australian stock market.
Since selling assets is an unattractive strategy, CanWest has no choice but to cut costs in order to keep EBITDA from slipping. As CanWest's vice-president of regulatory affairs Charlotte Bell put it at the Canadian Association of Broadcasters conference in Ottawa last week: There are only two ways TV networks can maintain earnings in a deteriorating market - find new sources of revenue or start slashing costs. "I'm not sure how we're going to get there."
On Wednesday, CanWest took the first steps toward slashing costs, eliminating 560 jobs across its Canadian operations, which represents about 5 per cent of its work force. Few analysts expect CanWest will be the only media company that needs to scale back operations in the coming year, but CanWest's cuts will likely prove the deepest.
The moves will save about $61-million from the company's operating costs, a significant number, but not enough to dramatically alter the covenant problem.
"It addresses the cost side of the equation, which is helpful and may offset some pressure, but it's really the [revenue] issues that will be particularly challenging for 2009," Mr. Wetmore said. "That's what will likely drive EBITDA and covenant headroom during the year."
If Izzy Asper believed some deals require risk and sacrifice, the Alliance Atlantis purchase now fits that bill. Goldman Sachs Group Inc. put up most of the money to help CanWest buy Alliance's 13 specialty channels, which CanWest saw as a strategic necessity to compete with CTV, which owns dozens of them. But CanWest must buy out Goldman's stake in 2011, and the price hinges on the combined performance of its Global TV operations and the Alliance channels.
This uncertainty has pushed CanWest's shares down to levels even its biggest backers had not predicted possible.
Insurance company Fairfax Financial Holdings Ltd. began increasing its stake in CanWest last year, figuring the shares were undervalued.
Fairfax now holds a 22-per-cent stake in the non-voting CanWest shares, and the company is buying up more of the stock at lower prices. That strategy - generally known as averaging down - lowers the exit price for the investor should the shares start to climb again.
"There still seems to be value there," said Paul Rivett, chief legal officer at Fairfax. "And if you can get the same value at a lesser price, it does affect the average cost."
CanWest (CGS)
Close: 80¢, down 5¢
***
How it breaks down
CanWest media inc. (broadcast) $950-million
Limited partnership (newspapers) $1.3-billion
CW media holdings (specialty channels) $797-million
Ten group (australian assets) $616-million
***
Headwinds
The Bank Covenant
CanWest must keep its total debt at no more than five times EBITDA, or face the ire of its lenders. At the end of the last quarter, the ratio was 4.36. But there are concerns about a softening economy in 2009.
Advertising Erosion
A recession, and a subsequent slowdown in consumer spending has all media companies concerned about the impact on advertising revenue. CanWest relies on ad sales for about 85 per cent of its revenue.
Australia
The most decisive fix for CanWest to ease its debt constraints would be to sell assets such as its Australian TV network. Analysts believed the network could have fetched upwards of $1.2-billion less than two years ago. But selling into a down market would bring in smaller returns now.
© Globe and Mail
