New ProSiebenSat1: ‘Sword of Damocles’ -
ProSiebenSat1: ‘Sword of Damocles’
A week ago Pro7/Sat1 issued its second profits warning of the year, which “crystallized investors’ fears,” says a report Oct 2 from bankers Morgan Stanley. This, says the bank, has “refocused investors more notably on leverage concerns and management changes”.
“July and August were more or less flat Year-On-Year, but German Net Advertising Revenue (NAR) collapsed in September, and October is not shaping up well. With macro indicators slowing, TV ad-spend shrinking all across Europe, an excessive reliance on ‘spot advertising money’ and uncertainty regarding management changes, we believe Pro7 should experience a tough 2H08 (estimated) and 1H09e,” says the bank.
The broadcaster has now warned that its earlier EBITDA guidance for this year (of €780m) is now likely to be within the €670m-€700m range, or potentially €100m less than anticipated. This is, by any measure, a gloomy outlook for this major German satellite and cable broadcaster and could even get worse, warns the bank.
With the ad-revenue market in Germany collapsing in September (and Spain down 25%, and the UK also down 25%), Pro7/Sat1 is particularly vulnerable. “Prosieben is still operating a recovering commercial model. Because of the 1Q08 failure, the German Free TV revenue of the group now rely excessively on ‘spot money’ as opposed to long term planned advertising campaigns. This is a very volatile kind of spend which tends to get cut before any other budget,” says the bank’s report. “Also, the early indicators show that October is shaping up badly, in line with September. The NAR growth run-rate at Prosieben is therefore declining very steeply which means that Q408 and most likely the beginning of 2009 will be lacklustre.”
Morgan Stanley warns that recent –and possibly future – management changes are not helping matters, and given that the integration of SBS “is far from over”. The note continues: “We think good value resides in Prosieben but high uncertainty and a lack of clear leadership prevent us being more positive. The imperatives created by a complex financial structure with high leverage are perceived as a sword of Damocles over public investors’ heads. Until cash requirements are quantified and / or diminished, and private equity’s intentions are clarified, downside risks (dividend cut, underinvestment in core business etc.) are likely to prevail on Prosieben’s virtues.”