March 17, 2020

Debt & Ad Cuts Will Hurt Some Media

Debt is interesting. On one hand, it’s appealing because it’s non-dilutive and, so long as cash flow is strong, the interest and payments aren’t an issue. On the other, if cash flow starts to dry up, those same payments become a problem.

Axios published a story on how major media companies are selling assets that were once considered important. Sara Fischer wrote:

Driving the news: NBCUniversal quietly sold its entire $500 million stake in Snapchat earlier this year, The Hollywood Reporter reports.

AT&T sold its stake in the Game Show Network for over $500 million last year. It has also shed several international telecom businesses since buying Time Warner in 2018 for $85 billion.

ViacomCBS is looking to sell Simon & Schuster, the nearly 100-year-old publishing business, to focus on streaming and video.

To explain why this is happening, let’s look at a chart that Axios put out back in October.


I bring this up because debt is only manageable when there are stable cash flows. For many publishers that are still dependent on advertising revenue, this climate we’re operating in means ad budgets are anything but stable.

This brings me to a conversation about Vice.

It raised $250 million in debt last May to help fuel growth. It told The Wall Street Journal that the funds were “allowing us to execute our new leadership’s strategic vision for the company.”

On its own, $250 million in debt really isn’t that bad. AT&T has $220 billion, so comparatively, it’s a drop in the bucket. However, in its quest to get a massive valuation a few years ago, Vice, frankly, screwed itself.

When Vice first raised its 2017 round that valued it at $5.7 billion from TPG, there were terms within the agreement that have now come back to hurt Vice. According to The Wall Street Journal:

Vice agreed to guarantee TPG substantial payouts down the road. Under the terms of the initial deal, Vice anticipated making payments worth up to nearly $400 million to TPG in stock and cash dividends between 2020 and 2024, starting last month, according to documents reviewed by The Wall Street Journal.

Last year Vice Media renegotiated terms with TPG, which agreed to adjust the payments to favor stock over cash, people familiar with the situation say. That gave Vice some breathing room, but the new arrangement could leave TPG as the largest outside shareholder and dilute other investors.

Vice has three problems here:

  1. The bulk of its revenue is still coming from advertising, which is going to dry up (more on that below).
  2. It has little subscription revenue, which would have been stickier.
  3. It has to make large payments to its debtors that will eat even further into any sort of hope for profitability.

With hundreds of millions in debt plus this need to pay TPG is going to cut drastically into Vice’s ability to operate. Couple that with what I expect to be a contraction in ad spend and we have this vicious cycle that will result in further reductions at the company.

I haven’t seen Vice’s financials, so I could always be wrong, but I don’t think I am, though. Vice has already stretched itself financially for years and now we’re dealing with a major event like we’ve never seen before. Being an unprofitable digital media business with hundreds of millions in debt is not where I would want to be right now.

Ad budgets will get tighter

Whenever there are economic problems, ad budgets start to dry up. Why? It’s one of the more liquid budgets in that the costs aren’t really fixed.

This will have an immediate impact on publishers over the next couple of quarters. We’re already seeing it.

The Wall Street Journal reported back on March 5th that the impact of Coronavirus on advertising was starting to become a problem. It reported:

U.K. broadcaster ITV PLC became one of the first to raise the alarm, when it warned Thursday that the impact of reduced advertising spending from the leisure and tourism industry would hurt its outlook. That sent its stock down 10% in London, and extended its rout this year to 32%.

Businesses are paring back ad spending amid a widespread cancellation in travel plans, as people back out of planned cruises and holidays as new epicenters emerge globally for the disease. Cuts to this kind of discretionary spending, a metric of companies’ confidence that is often closely watched by investors, can sometimes signal that there may be deepening concerns about coming corporate earnings.

The New York Times also issued a regulatory filing that suggest things could become problematic. The Times revealed in the filing:

However, we are seeing a slowdown in international and domestic advertising bookings, which we associate with uncertainty and anxiety about the virus. We therefore now expect total advertising revenues to decline in the mid-teens in the current quarter, with digital advertising revenues expected to decline 10%. We remain broadly in line with all the other guidance numbers we gave in the call in early February.”

I expect the numbers to be a lot worse now that companies are realizing just how bad things are getting.

I’ve had a few conversations with media companies over the past few days and they’re all saying the same thing: things are tightening up. I would be surprised if any of these companies bring on any new employees. Why would they? With economic uncertainty, not adding fixed costs—salaries—is important.

How bad could it get?

Joshua Benton from Nieman Lab published a great piece on the impact of Coronavirus on media from a business perspective. One part worth calling out:

The news industry has long been unusually responsive to the broader economy; advertising gets cut more quickly than overall spending does. (In 2009, U.S. ad spend dropped 12 percent, significantly more than the 2.5 percent decline in the overall economy. That responsiveness is why the classic chart of newspaper advertising is so wavy even decades before the web came along.)

AdAge put together a chart to show the impact of the last recession on ad spend.


Obviously, those 2020 and 2021 numbers were just forecasts and they’re likely completely blown. Will we see advertising pull back as much as 2009? While I can’t predict how far it’ll pull back, expect that it will pull back.

What comes next?

I’ve heard a lot of talk about war these past few days. A colleague used to phrase “war room” multiple times in conversation. New York City’s Mayor said war in a press conference. People are talking about war time CEOs.

What comes next is hard to predict anytime we see one of these economic situations. Some are saying that this is a different type of financial crisis than the 2008-09. I’m no economist.

I’m no economist, but if the economy constricts due to people being quarantined for weeks or months, the impact on media could be significant.

Times are going to be tough. Budgets are going to dry up. For the media companies that got profitable on the back of truly diversified revenue streams, kept a strong reserve of cash in the bank, and didn’t over-lever, this will be a difficult, but surviving time. For those that never got profitable, relied entirely on advertising and borrowed a ton of money, such as Vice, well, I’d be a little worried.