The debt markets, shut tight in the wake of the global recession, are beginning to show signs of loosening with the announcement of a handful of sizable deals in the cable and satellite space in recent weeks.
But it's unclear whether renewed access to debt will bring the nearly-dry deal market back to life.
In the past two weeks, Dish Network announced a $1 billion private-placement offering of debt securities for general corporate purposes, Mediacom Communications announced a $650 million debt deal to help it refinance some old debt and Viacom announced an $850 million bond deal to finance a tender offer for old debt. Discovery Communications also closed a $500 million bond deal last week, used to retire bank debt and for general corporate purposes.
Moody's Investors Service senior vice president Russell Solomon said the debt markets have been showing signs of life in the past few weeks, and that the cable sector, with its stable economics, continues to be attractive. He added that more deals are expected to come through the pipeline.
“We're beginning to think it could be a busy fall,” Solomon said.
The Dish deal, which closed on Aug. 17, involved $1 billion in 7.875% notes due 2019. Dish did not reveal what it will do with the money — it stated in filings with the Securities and Exchange Commission it would use the proceeds for “general corporate purposes.” And the deal is at a comparable rate to one the satellite giant made in May 2008 — before the debt markets seized — for $750 million in 7.75% senior notes.
Mediacom will use the proceeds of its deals to push out maturities on the old notes from 2011 and 2013 to 2017 and 2019. The transactions allow the MSO to replace the existing notes with lower cost debt – the blend of the bonds and the new bank debt is lower than the blend of the notes that are being taken out.
The Viacom deal is essentially for the same purpose — replacing existing debt with lower-cost notes and to extend maturities. Viacom has said that whatever is left over after the tender will be used to pay down borrowings from its revolving credit facilities and/or its commercial paper program.
Discovery closed its bond deal on Aug. 19, selling $500 million in 5.625% senior notes due 2019. The proceeds will be used to repay $428 million in term loans due in 2010, with the rest to be used for general corporate purposes.
While the Mediacom and Viacom deals are basically refinancings, some analysts believe that is a signal that the markets are beginning to open up and may be receptive to re-entering the mergers and acquisitions space.
“Refinancings to stretch maturities are the first step to deals happening again,” said Miller Tabak media analyst David Joyce in an e-mail message.
Other analysts believe that the recent debt deals may be more a sign of companies seizing an opportunity rather than a desire to re-enter the deal fray.
“These companies see an opening in the debt markets and they are taking it,” said one analyst who asked not to be named. The analyst, who requested anonymity because he did not officially cover the companies in question, said the debt is most likely targeted for share repurchases and to reduce interest expense, rather than M&A.
“The next deal you are going to see is for the Travel Channel and that is less a reflection of the deal market coming back and more of a reflection that this is something for sale that some of the players want. But it [a more open debt market] does make the prospect of doing deals less onerous.”
Cox Communications was reportedly taking first-round bids for the Travel Channel last week. NBC Universal, News Corp. and Scripps Networks Interactive were among the early bidders for the network, according to published reports. Time Warner Inc., IAC/InterActiveCorp and Comcast were cited as also possibly interested in the channel, which analysts valued at between $600 million and $700 million.
While the current state of the economy will play a big role in whether deals get done — no one wants to sell at the bottom of the market — debt is an integral part of M&A. And the lack of affordable debt has been the culprit in several scrapped auctions for cable systems in recent years. Insight Communications famously scrapped its planned sale in 2008 after the field of possible bidders was constrained by the lack of bank financing available for a deal.
Even those deals that were done had a minuscule debt component compared to prior years. For example, NBC Universal's joint purchase of The Weather Channel with Bain Capital and the Blackstone Group for $3.5 billion was financed with about 60% equity and 40% debt, according to Blackstone. In the past, deals of that size were financed in the 70% debt and 30% equity range.
Solomon wasn't convinced that increased debt availability would lead to a hotter deal market — the economy, declining growth valuations and unrealistic pricing expectations would outweigh that, he said. He added that he didn't expect any sizeable M&A deals in the space until well into next year. And even then, debt-laden deals may be a thing of the past.
“Deal structures may have to look to get a little bit more creative again with preferred stock or other quasi-equity financing structures,” Solomon said. “The days of very high leverage financing these transactions — 70/30 or even more extreme than that — are gone for awhile. The market tends to have a short-term memory, but not this short-term I think.”