One Thing To Watch In 2009 – Toxic Debt

Michael Hedges January 5, 2009 Follow on Twitter

Multi-national publisher Mecom Group has become the most recent poster child for debt rattled publicly traded media companies. Once – and not long ago – the darling of rapturous financial projections it now can’t meet debt covenants exceeding €600 million, a figure that has increased more than ten-fold since the rapture. Media companies are becoming sub-prime, er, toxic.

Mecom CEO David Montgomery would seem to be under pressure to shed assets. Rumors abound of which parts of the company are being shopped and who might be looking over the books. Mecom’s bankers hired PriceWaterhouseCoopers to independently evaluate the possibilities, perhaps a task unfairly imposed during the holiday season.

Potential buyers for Mecom’s Norwegian subsidiary Edda Media include A-pressen, widely considered the most obvious. Others have bid on the juicy parts or the whole lot at a fire-sale price. Berner Gruppens offered about €200 million. Mecom hopes A-pressen stumps up for about €250 million for the lot, saving the discomfort of selling it off piece by piece. At a more hopeful moment Mecom valued Edda Media, which publishes a slew of local and regional newspapers, operates more than a dozen websites and owns a couple of local TV stations, at about €500 million.

Meetings held between Edda Media and A-pressen executives have been called “constructive,” said journalist union representative Carine Johansen to journalisten.no (December 15). And cash might not be the biggest problem. The Norwegian Competition Authority will be called on to waive media concentration laws. A-pressen, majority owned by the Norwegian Confederation of Trade Unions and Telenor, publishes a slew of local and regional newspapers, owns local radio and TV stations and 50% of TV2.  A London meeting between Mecom and A-pressen (December 16) produced no deal.

Norwegian media watchers believe Montgomery wants to avoid selling Edda Media, the preference being for shedding its German newspapers. Berner Gruppens editorial director John Arne Markussen suggested to firda.no (January 2) that Mecom will “consider whether it is more sensible to sell something different, if they find buyers and good solutions.” A year ago Markussen questioned “how long David Montgomery can manage to keep Mecom’s alive,” in an interview with Nettavisen (December 23 2007). “He has the use of cash flow from the Norwegian business to operate in debt.” That question seems to have been answered.

The Polish government may have tipped its hand to aid Montgomery’s fire sale. The Finance Ministry put up for bid in early December 85% of Przedsiebiorstwo Wydawnicza Rzeczpospolita (PWR), the State holding company that owns 49% of Presspublica, publisher of Rzeczpospolita and Parkiet. Mecom holds the remaining 51%. Bidders, identified by the Finance Ministry (December 23), include two Polish publishers, Axel Springer, Respekt Media, a Czech publisher, and a Polish investment group known only as AV Investor. The Ministry will make its choice on or about January 23rd.

Axel Springer owns the tabloid FAKT, the daily Dziennik and about a dozen other titles in Poland.  Respekt Media, owned by stockbroker and coal billionaire Zdenek Bakala, indicated (December 31) it had begun talks with Mecom on acquiring the remaining shares of Presspublica. There it is. Bakala bought Czech and Slovak business publisher Economia from German group Verlagsgruppe Handelsblatt last year.

In addition to the 51% stake in Presspublica, Mecom owns four radio stations, nine regional newspapers, nine free weeklies, 12 websites and two ad agencies in Poland. In normal times Mecom might have been willing to bid in the privatization plan for PWR.

Just after Christmas the fate of Mecom’s German newspapers became the object of considerable speculation. A potential sale of Berliner Verlag and Hamburger Morgenpost to M. DuMont Schauberg (MDS) was widely reported. Berliner Verlag dismissed the rumors are “pure speculation,” reported Mediacity.de (January 2). For any potential suitors all German media watches cite the looming presence of the Bundeskartellamt – the competition commission.

As the end of December deadline for a 600 million payment drew neigh, Montgomery bought himself another 60 days for a 2.5 million payment and increased interest. Clearly all suitors are sitting on their money until Montgomery’s hands start to shake.

Mecom’s dire financial condition did not begin with the Great September Financial Meltdown, though Lehman Brothers sold a large block of discounted stock in October. Stock traders grew wary more than a year ago. The company’s share price has fallen precipitously.

Putting Mecom together Montgomery boldly charted into becalmed waters. This investment vehicle that happened to be in the media business would buy up – at a premium with OPM (Other People’s Money) – high performing newspapers in Scandinavia, Germany and elsewhere. Montgomery’s ‘magic’ would be cost control. Ridding everything from union jobs to paperclips would yield higher profits, dividends, success, happiness. As the debt covenants drew close it was clear that the expected return – imagine those early PowerPoint presentations to investors - wasn’t materializing as planned.

One German media writer listing 75 reasons why we’ll be better off in 2009 proclaimed Montgomery’s “end” number 39. “Montgomery is not only one of the voracious locusts who invests little but always calls for higher returns, he is an ignoramus and declared destroyer of media quality,” wrote Rüdiger Suchsland in Telepolis (January 4). “Bad times are always good times for arts and journalism,” he wrote, is reason number one to be happy it’s 2009.