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Pro7 facing financial pressures |
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| Chris Forrester, on 23-07-2008 |
 German broadcaster Pro7-Sat1 has been under some pressure lately, with a depressed share price, heavyweight management changes and facing challenges on its forward ad bookings. When a bank’s report talks about the possibility of Pro7 “breaching its financial covenants”, everyone takes note. Not helping is a veritable stampede of senior staff saying they’re leaving.
The latest departure is CEO Thomas Schulteis. He is leaving along with
chief executive Guillaume de Posch who has already said he will go in
December.
The banker’s report is from Morgan Stanley, and they stress that they
view a covenant breach as “very unlikely in 2008e” [but] “2009e and
2010e could potentially be more at risk.” ProSiebenSat1’s share price
dropped below €6 on July 22.
The bank’s note to investors says: “Prosieben should have the financial
resources to pay a €230m dividend for fiscal year 2008 (we estimate
this would allow interest repayment at the Holding Co). However, this
may not be the case in 2009 and /or 2010 if trading deteriorates much
further and EBITDA keeps shrinking.”
“With over €3bn of debt, interest expenses exceeding €200m in 2008e and
a looming advertising downturn, we think Pro7 should cut its dividend
to ease the FCF outflow requirements and allow investments in the core
business. We thus cut our dividend forecasts by 51% (to
€0.52/preference share). On our new estimate, the dividend would be
2.5x covered. Dividend yield is 8.7%,” says the note.
“The risk of seeing Prosieben's long-term trading and/or assets be put
at risk to satisfy ordinary shareholders' interests is, however, very
low in our view,” says the bank. However, “the lack of clear leadership
constitutes an additional concern as trading conditions get harsher and
the SBS integration is far from being over.”
“Prosieben is the second-largest commercial broadcaster in Germany,
with just over 40% share of a €4.1bn advertising market. The company
has created the third-largest online advertising network in Germany and
post the merger with SBS now operates TV businesses all across
northern, central and eastern Europe. From that point of view,
Prosieben has strong geographical and strategic positioning. Moreover,
Prosieben’s key market (Germany) is one of the most fragmented in
Europe, mostly due to historically high cable penetration, which means
that structurally, the group has far less to lose than its European
peers. The group is therefore one of better positioned of the European
Broadcasters we cover,” says the note.
The broadcaster’s operational attractions are many: “Currently trading
on less than 5x PE in 2009e, one could argue that, even following the
group’s profit warning in Q108, the stock has fallen too far and begins
to offer some good value. Our view on this is that leverage concerns
and volatility created by the current equity squeeze aside (tough to
exclude as Net Debt is nearly 3x market cap), Prosieben would most
likely be a very interesting stock to buy for the long term,” says
Morgan Stanley.
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