URING THE RECESSION OF 2001, investor Warren Buffet made famous

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URING THE RECESSION OF 2001, investor Warren Buffet made famous Powered By Docstoc
					                                                        MAGNA
                                                         MARKETS
                                                            MONTHLY


                                                    May 2009




D   URING THE RECESSION OF 2001,
    investor Warren Buffet made
famous comments about what gets
revealed when a tide goes out.
His reference to the way in which economic downturns put
a spotlight on structurally weak businesses is no less true in
the current environment, where scores of large media are
no longer as dominant as they once were and suppliers
have revealed themselves to be financially vulnerable to weak operating results and fickle capital markets.

But what is the impact of financially weak media suppliers on advertisers and their agencies? Media
suppliers may undergo restructurings, combine with competitors, spin-off weak divisions, liquidate a
business, or merely seek to avoid any of the aforementioned actions. Each one of these scenarios presents a
different combination of challenges (and occasionally benefits) for advertisers and agencies. In the short-
term, issues advertisers and agencies face when dealing with a media supplier in financial distress include:

   Changes to negotiating leverage
   The potential need to revise a media plan                                In This Edition
   Re-evaluation of a supplier’s content development                            Media supplier financial scenarios
    strategy                                                                      and what’s at stake (P.2)
   Changing approaches to risk in content / distribution                        Examples across key markets (P.4)
    development from new management teams




MAGNA Markets Monthly          Contact: industry.analysis@magnainsights.com or 646-865-2260                 May 2009   Page 1
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In the years leading up to the current recession, capital markets activities in the
media industry focused away from transformative acquisitions and towards the use of inexpensive short- to
medium-term debt to finance leveraged buy-outs or other ongoing capital needs. But as companies become
less profitable through the downturn, servicing debt is becoming more difficult for many, especially those
media suppliers with operations in structurally weak segments of the advertising economy.

As a result, many of these companies have been pushed by their investors to explore a wide range of
corporate initiatives. By the time this cycle of change is complete, the impact of capital structure choices
made during the recent credit boom will have a significant impact on the industry given the impact financial
issues will have on media company corporate structures and ownership.

In our summary table below, we explore the key short-term and
long-term issues related to the topic, and differentiate potential     Capital structure choices will
outcomes on the basis of the type of corporate activity that is likely be at least as meaningful as
to occur. Critically, we note that the table below is a look at a        advertising weakness for
change over time for an agency/advertiser relationship with a               many media suppliers
particular company rather than for a media sector, whose pricing
trends strongly depend on specific industry dynamics. In other words, a company that is financially
weaker than before may actually have significant negotiating leverage if it is still stronger than its rivals.




   Source: MAGNA


Pages 4-6 of this report illustrate specific examples of media companies under this range of conditions.


MAGNA Markets Monthly           Contact: industry.analysis@magnainsights.com or 646-865-2260       May 2009   Page 2
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Straightforward financial weakness can be favorable for advertisers, as the supplier remains a going concern and will
be particularly keen to retain existing business in order to avoid a situation where common shareholder equity is
wiped out. In many cases, financial weakness leads to out-of-court negotiations with bondholders, who may be willing
to effectively write-off significant amounts of debt in anticipation that the company could become profitable without
having to enter bankruptcy, a drawn out and costly process.

However, favorable outcomes are relative, as a weak supplier with a dominant position in a sector may still be in a
position to drive higher pricing. Financial weakness may weaken a supplier’s position only relative to the position it
would be in if its finances were more stable. In absolute terms, such a supplier can still negotiate from a position of
strength.

We differentiate a restructuring as a situation where a company actually has entered into bankruptcy protection but is
similarly continuing as a going concern. Although bankruptcy provides some cover for more radical change inside an
organization, it is likely that a supplier facing this situation will behave in a manner similar to a company that is “only”
financially weak.

In both situations, content quality may suffer as suppliers become increasingly risk-averse and concurrently reduce
budgets for content development.

Consolidation when two weak companies combine to form a stronger one will differ from a situation in which the
merging companies are strong. If prior to a merger, individual suppliers were financially weak or undergoing a
restructuring, content investment would be low and risk aversion would be high. Against that basis, consolidation
may result in a stronger sector with more total content investment and less overall risk aversion, because probability
of failure may fall and suppliers’ leverage with advertisers may rise (thus causing positive pressure on pricing).
Conversely, consolidation of strong players in a strong market may result in less overall content investment and more
risk aversion.

A spin-off is unlikely to impact advertiser pricing, but instead can result in less risk aversion and more content
investment as a new entity is free of constraints placed upon it by its former owner (whose interests may not have
favored growth for the newly spun-off company).

Lastly, liquidation is a situation where a supplier ceases to be a going-concern. Although common within the print
industry, where individual magazine titles open and close with a degree of regularity, it is uncommon for other
sectors. In a liquidation, bondholders sell off assets of the firm and distribute the proceeds among themselves,
dissolving the company in the process. Few suppliers face the risk of forced sales in this environment as bondholders
would be more willing to agree to new terms rather than sell at what they believe to be below market prices given a
limited pool of prospective buyers.



MAGNA Markets Monthly               Contact: industry.analysis@magnainsights.com or 646-865-2260             May 2009   Page 3
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                            Antena 3                  Tele5                         ProSieben                                     ITV                                           CBS
Stage                             Potential consolidation                         Financially Weak                          Financially Weak                               Financially Weak
Why are they at risk       Advertising market down 35-37% in              Outperforming the German TV          Advertising market revenues are down         Currently has $240mn in cash but
                            April per Tele5. The worst in Europe            ad market but has €4bn+ in            ~20% in the first quarter; ITV in line        cash flow is deteriorating along with
                           Spain is Western Europe’s weakest               debt as a result of 2006              with the market                               the ad market
                            economy, hard hit by the housing                investment by private equity         Acceleration of ad declines from             Could tap a $3bn bank facility, but it
                            meltdown. The unemployment rate of             Interest expense is mounting:         January to March: ITV family net ad           matures 12/2010
                            those <25 years old is 32%                      €274mn in 2008 v. €144 in             revenues down 25% in March vs. -10%          In May, National Amusements (NAI),
                           Need more capital for digital terrestrial       2007                                  in January                                    parent of Viacom and CBS,
                            television (DTT) investment                    €1.8bn matures in 7/2014.            Contract rights renewal law places            restructured $1.6bn to extend
                           Face 3% tax on revenues to help                 Currently has €633mn in cash          limitations on media price inflation          payments to 2010. The debt is
                            bridge public broadcaster’s funding            Sales force model is being           Pension fund and debt servicing costs         secured by shares of Viacom and
                            gap                                             reworked                                                                            CBS
                                                                                                                                                               NAI’s $500mn of the $1.6bn loan
                                                                                                                                                                must be repaid by ‘09
What may happen            Reducing programming investments               Sold C-More, a PayTV film and        May sell stakes in production business       More debt may be issued with
                           TL5 considering merger with other FTA           sports content provider               and Freeview                                  restrictions on operations and
                            broadcasters Cuatro & Sexta                    Reworking ad sales model             CRR revision discussions ongoing              financial flexibility
                           A3 is trying new bundled sales model,          Rival RTL plans to cut content       Rumors of ITV merging with C4 or Five        A new bank facility will have to
                            selling inventory across all three              spend by 15-20%; this could           have subsided after C4 and BBC                negotiated before 12/2010
                            channels                                        lead Pro7 to also cut                 worldwide merger rejected                    Recently refinanced $1.2bn of debt
                           Exploring PayTV Joint Ventures                  programming as the bar is            Explore payTV services                        due 2010 by issuing new debt at
                                                                            lowered                              Think tank proposes imposing a 1% tax         higher interest & tapping bank
                                                                           Debt for equity swap would            on Sky and Virgin revenues and/or a 1%        facility
                                                                            wipe out common                       tax on cell phone operators to fill PSB      If NAI does not have $500mn by the
                                                                            shareholders                          funding gap                                   end of this year, Viacom and CBS
                                                                                                                 House of Lords exploring idea of              control may change
                                                                                                                  diverting part of BBC license fee for PSB
                                                                                                                  on other channels
                                                                                                                 Though not as strong as before, pricing
                                                                                                                  may not fall given that competitors are
                                                                                                                  in a worse position
        MAGNA Markets Monthly                    Contact: industry.analysis@magnainsights.com or 646-865-2260                                          May 2009   Page 4
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                                      Time Warner - AOL                                  Univision                       Clear Channel (Radio)                             Tribune
Stage                                         Spin-off                                 Financially Weak                       Financially Weak                           Restructuring
Why are they at risk             AOL has suffered as it transitioned         Similar to other leveraged buy-         Parent CC Media has $22bn in            Currently in bankruptcy
                                  from a primarily subscriber-based            outs, Univision is finding it harder     debt due to leveraged buy-out,           restructuring
                                  business to an ad-supported one              to meet debt service costs as ad         which was agreed to prior to            Continuing to make cuts to stay
                                 No clear (or successful) strategy            revenue falls                            economic downturn and                    cash flow positive
                                  emerged under recent management             Auto advertising, Univision’s            massive reduction in spend in           Chicago Tribune ad revenues
                                  team                                         largest category, fell 41% in the        the radio industry                       down 20% in the first quarter of
                                 AOL served as a major corporate              fourth quarter of 2008                                                            2009
                                  distraction to Time Warner                                                                                                    In 2008, said it had enough cash
                                                                                                                                                                 to operate while in bankruptcy,
                                                                                                                                                                 but this is not reflected in the
                                                                                                                                                                 bond market and its cash position
                                                                                                                                                                 is further threatened by ad
                                                                                                                                                                 revenue declines
What may happen                  AOL could be take a strategically           Further cuts to jobs, recently          More radio stations could be            Editor’s memo to employees in
                                  different direction with brand new           removed CMO                              sold to raise cash                       April said the newsroom could
                                  management and be less associated           Asset sales or change in                S&P debt rating on parent CC             invest in new people to grow in
                                  with “old media”                             relationship with Televisa               Media could be cut to junk               the future
                                 In a spin-off, the current stock             (Mexico’s largest media company,         status, making it more                  Currently no word on future asset
                                  holders do not change and this could         Univision’s largest program              expensive to finance                     sales but the group owns 20+ TV
                                  serve as a limit to real change              supplier and a one-time suitor for      Restructuring operations;                stations, 12 newspapers, a cable
                                                                               the company)                             expected to be completed by              channel, and radio station
                                                                                                                        first quarter of 2010. Quality          Previously sold Newsday & Cubs
                                                                                                                        could be scaled back                     baseball team




        MAGNA Markets Monthly                 Contact: industry.analysis@magnainsights.com or 646-865-2260                                          May 2009    Page 5
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                                                                            MONTHLY



                                                 Prisa                                               CanWest                                                      Daily Mail
Stage                           Financially Weak/Potential consolidation                          Financially Weak                                             Financially Weak
Why are they at risk              Has the highest leverage (net                Used debt to acquire many properties. After several          S&P recently downgraded DMGT's credit rating to
                                   debt/Ebidta) among European                   quarterly losses, debt terms were breached and                junk
                                   publishers                                    interest payments missed                                     Accessing debt markets will be more difficult to
                                  Creditors could agree to give 1 year         After a series of negotiations, noteholders repeatedly        refinance old debt
                                   extension on about €2bn of debt until         agreed to postpone repayment                                 Pension deficits limit range of potential strategic
                                   3/2010 (net debt as of 1Q is €5.1bn          The company has until June 15, to come up with a              moves and financial transactions
                                  Advertising revenue declined 22% in           restructuring plan                                           Advertising at national newspaper division down 24%
                                   1Q09                                         Three distressed investors agreed to loan CanWest             in the quarter ending in March. Regional newspapers
                                                                                 more capital. By providing “debtor in possession”             down 37%
                                                                                 financing, these investors could be given priority over      National classifieds fell 55% in March quarter
                                                                                 CanWest’s assets under bankruptcy law                        Though not as strong as before, pricing may not fall
                                                                                                                                               given that competitors are in a worse position

What may happen                   The 1 year extension gives Prisa time        Current owners (Asper family) risk losing control of         DMGT says it expects to meet covenants and sees no
                                   to explore strategic options                  the company if debtholders are not satisfied                  need to refinance any facilities within the next 2
                                  Rumors suggest creditors may want            Already sold the New Republic magazine in March               years
                                   Prisa to merge with rival Mediapro            and looking to sell E! channel                               Could create more deals with rivals to share costs (ie
                                   before approving extension                   If sale of E! not successful, then the 5 stations will be     production, IT, picture services w/ Independent)
                                  May have to sell subsidiaries Media           shuttered by end of August 09                                Fewer editions. Regional newspaper division
                                   Capital and Santillana                       Significant holdings in Australia TV (Channel 10) also        Northcliffe has cut editions of three titles and moved
                                  Other businesses are cushioning the           for sale                                                      to overnight printing only vs. 4 editions during the
                                   blow from newspaper (El PaÍs) and                                                                           day before; Updates for the day will now occur online
                                   FTA (Cuatro) advertising exposure:                                                                         Sell unprofitable assets. DMGT sold 75% of the
                                   adv comprised ~24% of revenues in                                                                           Evening Standard in February
                                   1Q




        MAGNA Markets Monthly                  Contact: industry.analysis@magnainsights.com or 646-865-2260                                            May 2009    Page 6
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                                                                           MARKETS
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                                            APPENDIX 1: Media Supplier Scenarios in the Current Economic Climate

                             Financial Trouble                     Restructuring                           Consolidation                                Spin-off                              Liquidation
SHORT TERM ISSUES
Buyer negotiating leverage   Media buyer is likely to achieve      Supplier is willing to preserve key     Parent likely to assume commitments of       If new entity is a profitable         Supplier has no
                             better terms/pricing as financially   buyer relationships as it may want to   the previous supplier. In the long-term, a   operation with a stable               incentive to honor
                             troubled company needs                retain them after agreeing to new       stronger buyer in the parent and fewer       portfolio of assets and clients,      commitments
                             advertiser commitments and            terms/rising from bankruptcy            suppliers could suggest weaker buyer         buyers could have to make
                             prioritizes securing cash flow.                                               power on the whole                           bigger concessions than under
                                                                                                                                                        previous management. If prior
                                                                                                                                                        to the spinoff the company
                                                                                                                                                        was very independent,
                                                                                                                                                        negotiating leverage may not
                                                                                                                                                        change at all

Need to rework media plan    Increased need to rework a            Limited need to rework media plan       Reallocation of media budget                 Reallocation of media                 Agency will need to
                             current media plan and prepare        if new debt terms are rescheduled.      likely to remain low, unless terms           budget likely to remain               rework allocation of
                             for the contingency that the          A contingency plan may be               change dramatically                          low, unless terms change              advertising spend to a
                             company may liquidate                 necessary if new terms cannot be                                                     dramatically                          new supplier
                                                                   reached among creditors




LONG TERM ISSUES
Investment in new content    Cost-cutting in the short term is     Investments in new content could        New company is likely to try new             A healthy spinoff now has             No investment
                             likely to create weaker content,      decline as the new debt terms           ideas either through financing               new equity and flexibility
                             leading to declining audience         would be more stringent                 new projects or experimenting                to experiment. Limits to
                             shares and the need to rework                                                 with how the new company’s                   drastic change exist
                             media plan as target                                                          content may fit with the parent’s            because shares of the
                             demographics change over time.                                                overall mix                                  spin-off are allocated to
                             Look for new players to emerge                                                                                             parent’s current owners
                             as substitutes

Management risk aversion     As debt terms are renegotiated,       Management team would be                Parent company management                    With greater                          Management is ousted
                             bondholders impact day-to-day         replaced and is likely to be more       could take more risk to justify              independence, new
                             management of the business.           risk averse than previous team          their acquisition and try new                management could be
                             Management is likely to take                                                  ideas; however, this is balanced             open to taking new risks
                             fewer risks as bondholders focus                                              by a higher cost of failure                  to establish/solidify its
                             on periodic interest payments                                                                                              place in the market; this
                             and the long-term viability of the                                                                                         is balanced by a higher
                             business                                                                                                                   cost of failure




MAGNA Markets Monthly                       Contact: industry.analysis@magnainsights.com or 646-865-2260                                                              May 2009       Page 7

				
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