Analysis: Media players load up on debt
October 9, 2017
To badly paraphrase Archimedes: “Give me a leverage big enough, and I can move the world”, a sentiment that Ampere Analysis has identified as a key factor behind strategies from global media groups including Amazon, Altice, Netflix and Verizon – and to a lesser extent, players like Sky, ITV and Liberty Global. These groups have all loaded up on debt to drive their regional and/or global expansion plans.
The latest report from Ampere Analysis is a financial evaluation of 27 leading film, TV and technology firms and uses key ratios to assess the performance of traditional cable, broadcaster and studio groups alongside the new media disruptors. Despite identifying extremes in the financial ratios – including high leverage ratios – across the sector, the report indicates that current financial indicators are far healthier than those experienced by some TV companies during the dot com bubble. Even those highly-leveraged groups typically have solid cash flows with which to service their obligations.
The financial ratios we analysed:
- Debt to equity, to determine leverage levels
- Operating cash flow ratio, to measure if current liabilities can be serviced
- Operating income margin, to ascertain if revenue can be converted into profit
Daniel Gadher, Senior Analyst at Ampere Analysis says: “Much of the success of media companies is evaluated on subscriber numbers, users, retention rates and revenues. By exploring key financial ratios, we are able to add further insight into the underlying strategies used by the media companies, and to illustrate their exposure to potential risks.”
- The new media players have adopted polar opposite strategies. With their low debt to equity ratios, Facebook and Google represent cash-flush and debt-light businesses with plenty of opportunity to use their existing market position to grow further. In fact, arguably their main challenge is what to invest in. Ampere Analysis identified Facebook and Google as having the strongest financial ratios out of any of the 27 media and TV companies assessed.
- In complete contrast, Netflix and Amazon have chosen to drive growth at the expense of their short-term profitability. These players prefer to operate with moderate or very low margins, or even negative cash-flow, while they invest in expansion, with a view to long-term positioning.
- In the cable space, Altice has been on a rapid three-year acquisition spree. Its bill for Cablevision, Suddenlink, SFR and Portugal Telecom (amongst others), has resulted in a total of €82 billion in short and long-term liabilities, and the worst debt-to-equity ratio of the companies analysed. As with Netflix and Amazon, this is intended to drive a global strategy – in Altice’s case to create a global TV and communications player. Yet despite the high leverage, Altice’s other financial indicators are adequate.
- The traditional US media operators and studios boast solid financial ratios and profits, despite on-going cord-cutting. Although they may not have as much cash available as Facebook and Google, players including Comcast, Disney, Time Warner and AT&T/DirecTV have strong operating cashflow, low debt-to-equity and stable margins.
- The European operators fare worse than their US counterparts, with weaker operating income margins and higher levels of debt. European pay TV players such as Sky and Vivendi have been feeling the squeeze of increasing rights acquisition costs, competitive pressure from OTT players and market saturation for some time.
- European broadcasters such as RTL, ProSiebenSat.1 and ITV present a different picture. They have been repositioning their businesses through cost-cutting, investments in new media, moving to in-house production and ramping up international distribution. This approach has allowed them to respond to the underlying trends that impact their core broadcast operations.
- One challenge that the European pay TV groups face is the rising costs of high-end premium content rights for sports, new movie releases and expensive TV series. The pressure on their margins felt through repeated bidding wars has taken its toll and many are beginning to focus elsewhere on alternative, potentially more cost-effective investments. Sky’s Originals strategy is a case in point.
“Our analysis indicates that cord-cutting has actually had only minor impact on the underlying financials of US operators, who have adeptly managed margins and leverage levels despite the intense competition,” added Gadher. By contrast in Europe, our insight hints that other factors – including competition for rights and subscribers – is beginning to take its toll.
“Two big question marks remain. For how long can the land-grabs from Amazon, Netflix and Altice be sustained? And which areas will cash-flush Facebook and Google next target for investment?”