A TOXIC mix of structural, cyclical and funding problems confronting European media may force banks to take more control of newspapers as tightening credit markets limit their options to relax loan conditions. This month's bankruptcy of US newspaper group Tribune can be seen as a sign that lenders' attitudes are now hardening, despite the dubious benefits for banks of owning poorly valued media assets when both ad revenues and circulations are falling. Several struggling US newspaper groups have persuaded lenders to relax debt covenants in recent months, and UK-based Mecom – owner of more than 300 titles, became Europe's first newspaper publisher to win a covenant “holiday” this week. But Ken Doctor, news industry analyst with US information and publishing research firm Outsell, says: “The new stresses on the lenders make the relationship between the companies on the edge of default and their lenders a whole new ball game.” The first signs that investors are less willing to budge on loan terms are already there in Europe. Lenders to private equity-owned Amadeus Global Travel Distribution rejected a loan covenant waiver request in October, and UK chemicals company Ineos this month had to offer a large margin payment increase to get its waiver request approved. Mecom, which publishes titles around Europe including the Berliner Zeitung, won only a two-month delay for a covenant test due at end-December at the price of 2.5 million euros ($3.5 million) and a 175 basis-point rise in its core lending margin. It hopes to sell assets and says trading conditions remain challenging. Mecom shares areA now worth less than a penny, giving it a market value of just 13.5 million pounds ($20 million), while net debt was 587 million pounds at end-June. “Some of these organisations may not be able to pay interest charges,” says Panmure Gordon media analyst Alex DeGroote. “The banks will get the upper hand in any process of break-up and/or asset sales.” Rollercoaster Privately held Tribune was an extreme case – it was unable to meet covenants to keep debt below nine times earnings, whereas most struggling European listed counterparts are dealing with covenants to keep the ratio at about three or four. Private equity leveraged buyouts such as that of Tribune commonly burdened media companies with debt of six to seven times earnings before interest, tax, depreciation and amortisation (EBITDA). The owners of Dutch group PCM, whose top titles include NRC Handelsblad, were reprimanded by court investigators this month for loading the company with too much debt, even though net debt was only four times EBITDA at the time. Even so, the equity values of European companies such as Mecom and Britain's Johnston Press have tumbled so far that debt-for-equity swaps look likely in cases where companies have trouble meeting interest payments and buyers are scarce. Regional newspaper group Johnston has a market value of 78 million pounds, about one-sixteenth of its value at the beginning of the year, and net debt of 465 million pounds. “My hunch is that lenders wouldn't shut newspapers down but the existing ownership structure would be changed,” says one London-based financial analyst who follows the media sector, asking not to be named. Lenders are already starting to make their influence felt. McClatchy, the third-biggest US newspaper group and publisher of the Miami Herald, negotiated looser credit covenants in September, but in return agreed not to pay dividends in future unless it met debt-to-cash-flow targets. Italy's L'Espresso, even though its debt is only 1.8 times EBITDA, voluntarily stopped its dividend, and others are finding ways big and small to cut costs. Axel Springer, known for celebrity galas attracting the likes of George Clooney, says 2009 will be “a period of rest for company events”, while the San Francisco Chronicle has already slashed staff by more than half. But there is a limit to how far newspaper groups can restructure themselves, adapt to the Web's new realities and cut costs before banks step in to take more drastic action. Even those ahead of the digital curve will struggle, with about 20 unique visitors online required to make up the money yielded to newspapers by one print reader. “If they could flip this switch tomorrow and could be completely digital they would have only 15 to 20 percent of the revenues they're making today,” says Outsell's Doctor. “It's like hurtling down a rollercoaster and you're going over the top and you don't know what the bottom's going to look like,” he adds.
