Media firm mergers likely to slow down

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LONDON -- Takeovers in the media sector are likely to be few and far between until at least next year, especially given the high gearing and shaky cashflows of many firms in the industry, bankers and financiers said Wednesday.

Despite apparent bargain valuations close to six-year lows, and signs of improvement in some debt markets, there are obstacles. There is a large gap between buyers' and sellers' expectations, and the industry has structural challenges.

"There aren't really many signs of M&A (mergers and acquisitions) coming back," Geoffrey Austin, global co-head of media at Deutsche Bank, said at a London conference.

Austin added that the M&A market might pick up when equity markets improved, citing an historical correlation between the two, although he admitted the argument was "tenuous."

M&A activity in the sector has slowed dramatically since the world began to tip into recession, with just eight deals done in the last 12 months, of a total of 83 since January 2006, according to a slide presented at the MediaFinance conference.

Many media companies borrowed heavily to help fund restructuring of their business as they chased audiences moving away from print and TV to the Internet, but were hit by a slump in advertising revenues before they could reap the benefits.

Companies like British yellow-pages publisher Yell have been left with debt as high as a dozen times their market value. U.S. peer R.H. Donnelley filed for bankruptcy in May.

Simon Gluckstein, head of media at M&A advisor Hawkpoint Partners, said he believed some deals would take place over the next two years in cases where they are driven by such factors as regulation, shareholder pressure or distressed assets.

"I think there will continue to be a drip feed of distressed activity," he said. However, he added: "There's a need for recalibration of vendor expectations."

Since the start of this year, European newspaper group Mecom has sold assets in Germany, the Netherlands and Norway to cut its debt, and also held a rights issue.

British regional newspaper publisher Johnston Press tried to sell its Irish operations but abandoned the sale process after failing to receive satisfactory offers.

Louis Kenna, co-head of media and telecom finance at BNP Paribas, agreed that sales would occur where companies simply ran out of options, and private equity was ready to pounce.

"When a company runs out of cash... the banks say 'Let's sit down around the table.' But it's too late," Kenna said. "It's at this point that an Oaktree, an Apollo, a TowerBrook will have been doing their homework... and will walk in."

Other deals, especially medium-size and bigger deals, could be done by using equity instead of debt, most participants said.

Speakers at the conference dismissed the idea that a relaxation of competition rules for regional newspapers, implied in a British government report published on Tuesday, would lead to significant consolidation in the sector.

The report said existing legislation did not need to be changed but said the competition watchdog would take account of changes in the industry and judge each case on its merits.

The regional press has suffered more than other newspapers because of its greater dependence on classified advertising.

"I think there would be deals done to rationalize assets at the local level," said Tim Bowdler, chairman of Britain's Press Association and until 2007 chief executive of Johnston Press.

"Putting two large groups together such as Johnston Press and Trinity Mirror would be very difficult," he said, citing financing as likely the biggest hurdle.

Gluckstein said that in any case the idea of being first to test the regulator's new approach would be a disincentive.

"Who's going to be the one to go through that process and take the political risk, is the key question," he said.
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