Showbiz feels the fiscal pinch overseas
EmptySecond in a series on the impact of the credit crisis on Hollywood
Falling ad revenue, tumbling share prices, skittish investors, frozen credit markets -- from the U.K. to Germany to Russia, the economic picture isn't any prettier than it is in the U.S.
Talk to a European TV executive about the state of the business these days and you're as likely to get a shrug of the shoulders as a coherent game plan for dealing with what's predicted to be a major downturn in 2009.
"We're standing in the way of a tidal wave of disaster and everyone is acting like we can just keep on going," said one senior broadcasting executive with more than 20 years of experience. "It's almost eerie."
The millions of dollars of leveraged finance that drove a slew of private-equity buyouts in the past five years has dried up, its proponents say, while corporations are huddling around whatever cashflow reserves remain on their balance sheets.
"Without any leverage, we're out of business," said John Hahn, managing director of media specialst private-equity house Providence Equity Partners, speaking Wednesday at a conference in London, though he stressed that the debt markets will not be shut down forever.
"I'm confident that is a near-term worry," he said. "We have to hunker down and make sure we come out of this with a great growth profile."
Media analysts, who tend to have a less mystical take on things, predict that plummeting media stocks will drive a wave of defensive consolidations.
Publicly quoted media companies including Virgin Media, British Sky Broadcasting and RTL have all seen share prices more than halve in the past 12 months, while such pure content plays as British production houses DCD Media and Ten Alps have fared even worse.
"Confidence in the sector is through the floor," says Paul Richards, an analyst at Numis Securities in London. "Whereas we had everyone excited last year with several parties looking to acquire companies like ITV and Virgin Media, it is now a very different picture."
But while deals still can be financed at the smaller level -- "Wife Swap" producer RDF Media is in talks over a $78 million buyout offer financed by reality king John de Mol -- the funding is simply not there at the higher end of dealmaking. Meaning that, despite the collapsing share price of a broadcaster like ITV, there is no sign on the horizon of anyone who can finance a deal.
Pan-European free-to-air giant RTL Group has seen its share price plummet the past year, but the company is in better shape than most competitors. A strong performance in Germany helped compensate for declines in the French, Spanish and U.K. markets. RTL is actually in an expansive mode, eyeing acquisition opportunities in Eastern and Central Europe.
But the quickly shifting credit picture couldn't have come at a worse time for ProSiebenSat.1, Europe's second-largest broadcaster. The group recently took on 3.6 billion euros ($2.9 billion) in debt to acquire erstwhile rival SBS Broadcasting and had been hit with a $150 million fine by German regulators for dodgy advertising practices, sending its ad revenue and stock price into a tailspin.
ProSieben stock has fallen 88% in the past year and debt is going up -- currently at $4.8 billion and counting.
Other crash casualties have hit ProSieben's bottom line. The company wrote $5.2 million in interest rate swaps with Lehman Brothers after it went belly up. They also had to say goodbye to another $7.1 million that was part of a revolving credit facility partially guaranteed by the financial services firm.
Now, in the unenviable position of trying to generate more money in a recession, budget cuts and asset sell-offs are the order of the day. In its core German market, ProSieben has slashed 225 jobs and moved flagship channel Sat.1 from prime real estate in Berlin to a low-cost suburb outside Munich.
All options are reportedly on the table, including a sell-off of some of the group's core German channels. German publishing giant Axel Springer, thwarted by local watchdogs in its first attempt to buy out ProSieben, could make another run at the broadcaster. But ProSieben's debt burden could prove a deal-breaker.
Back in the U.K., ad revenue at ITV is expected to drop 9% in the next three months and online revenue also is expected to fall. And while the company's global content division might be fast-growing, its revenue from program sales, format licensing and production make up just a small proportion of the 1.5 billion pounds ($2.3 billion) total, meaning that ITV's commitment to spend $1.5 billion a year on programming looks to be on borrowed time.
The global film outlook isn't much better.
While moviegoing is widely thought to be the one area that will be unharmed -- if not helped -- by the economic slowdown, securing funds for everything from theater expansions to individual film projects is another story.
Hong Kong-based Global Entertainment Group has delayed the expansion of its China cinema business because the worldwide global financial crisis has scared off potential investment partners, according to CEO Johnny Hon. "In the current economic climate, many venture capitalists are scared," he said.
GEG had planned to invest $30 million to develop multiplexes in three China regions. It went ahead with a $10 million investment in the northeast, starting with the acquisition of a four-screen cinema in Harbin, Heilongjiang province in August. But Hon said that projects for Sichuan and Zhejiang are on hold until 2009.
Canadian exhibition giant Cineplex Entertainment, meanwhile, pointed to the credit crunch when it said that the failure of the Digital Cinema Implementation Partners consortium to raise digital-conversion financing would delay its own upgrade.
At Russia's Monumental Pictures, Olga Chirikhina is trying to focus on the bright side, even if her logic it has a cynical ring to it.
"If fewer bad films are produced here, it will only be better," says Chirikhina, deputy general for the company launched by Sony Pictures and Patton Media Group.
About 20% of films in production at the country's largest studio complex, Mosfilm, have been canceled or put on hold, studio director Karen Shakhnazarov said late last month.
"There was so much private-equity money, too many movies were made, and many shouldn't have been made in the first place," said Abhi Rastogi, managing director of Vancouver-based distributor Cinesavvy.
"The market meltdown has impacted a lot."
One territory that could actually benefit from all this is that burgeoning hotbed of finance, the United Arab Emirates.
"Abu Dhabi will become one of the first choices for filmmakers seeking financing as the Gulf is the region least affected by the crunch. This will in turn benefit us in drawing high-profile productions to be shot here," says Nashwa Al Ruwaini, director of the Middle East International Film Festival. "With all the developments that have taken place so far in Abu Dhabi, such as the establishment of Imagenation, the crisis could potentially accelerate the process of filmmaking and production here in the region."
Producer Imagenation, a subsidiary of government-owned Abu Dhabi Media, oversees the emirate's $1 billion deal with Warner Bros. and recently pacted with Hyde Park Entertainment to produce up to 20 feature films at a total cost of $250 million.
But even in the UAE, the smaller players are feeling the pinch.
Nayla Al Khaja, a prominent local filmmaker and producer, says banks are less willing to lend on projects or approve loans, and a group of investors from the banking sector recently backed out of one of his projects.
"Sponsors who were willing to put their money in one of our main documentaries pulled out, saying they cannot invest at the moment," he said.
Unfortunately, that sort of retrenchment is likely for many months to come.
When Dawn Airey gathered Five staff to a Central London theater at the beginning of the month to rally the TV team and lay out her vision as incoming CEO, she said that Boston Consulting Group had been hired to review operations and that job cuts likely would follow.
Leave it to consultants to be the one segment of the industry that doesn't seem to be suffering from the downturn.
Mimi Turner reported from London; Scott Roxborough reported from Cologne, Germany. Etan Vlessing in Toronto, Karen Chu in Hong Kong, Jolanta Chudy in Dubai and Vladimir Kozlov in Moscow contributed to this report.