Ampere Analysis: media debt to fuel growth is mostly manageable

The high levels of debt being incurred by big international media companies such as Amazon, Altice, Netflix and Verizon as well as significant regional players such as Sky, ITV and Liberty Global are of much less concern than the situation of internet companies before the dot com crash at the turn of the century, according to Ampere Analysis.

According to Ampere’s research, even highly-leveraged groups typically have solid cash flows that will enable them to service their debt obligations – something that was not true during the dot com crash.

The research group says that big media and tech companies have nevertheless adopted contrasting strategies, and some are better-placed to weather any storm than others.

While Facebook and Google are light on debt and strong on cash, 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.

One key finding is that European media groups including Sky and Vivendi are in a worse position that 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, according to Ampere.

US media operators and studios, by way of contrast, have solid financial rations and profits, despite facing the threat of cord-cutting. Comcast, Disney, Time Warner and AT&T/DirecTV have strong operating cash-flow, low debt-to-equity and stable margins, says Ampere.

European pay TV groups face a significant challenge in the shape of rising content costs, particularly for premium sports, new movies and TV series. The pressure on margins is forcing some to look elsewhere for content, with Sky developing its Originals line-up, for example.

While Sky and Vivendi face challenges, European broadcasters RTL, ProSiebenSat.1 and ITV have engaged in cost-cutting, investment in new media, development of in-house production and a ramp up of international distribution, allowing them to address long-term threats to their traditional business, according to Ampere.

The most relatively indebted company studied by Ampere is cable, telecom and media investor Altice, which has €82 billion in short and long-term liabilities, according to its count, and the worst debt-to-equity ratio of any of the 27 companies studied. However, said the analysts, Altice’s other financial indicators are “adequate”. Altice at the end of last week announced a €4 billion debt refinancing.

Daniel Gadher, senior analyst at Ampere Analysis said: “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. By contrast in Europe, our insight hints that other factors – including competition for rights and subscribers – is beginning to take its toll.