Pro7 facing financial pressures

German broadcaster Pro7-Sat1 has been under some pressure lately, with a depressed share price, heavyweight management changes and facing challenges on its forward ad bookings. When a bank’s report talks about the possibility of Pro7 “breaching its financial covenants”, everyone takes note. Not helping is a veritable stampede of senior staff saying they’re leaving.
The latest departure is CEO Thomas Schulteis. He is leaving along with chief executive Guillaume de Posch who has already said he will go in December.

The banker’s report is from Morgan Stanley, and they stress that they view a covenant breach as “very unlikely in 2008e” [but] “2009e and 2010e could potentially be more at risk.” ProSiebenSat1’s share price dropped below €6 on July 22.

The bank’s note to investors says: “Prosieben should have the financial resources to pay a €230m dividend for fiscal year 2008 (we estimate this would allow interest repayment at the Holding Co). However, this may not be the case in 2009 and /or 2010 if trading deteriorates much further and EBITDA keeps shrinking.”

“With over €3bn of debt, interest expenses exceeding €200m in 2008e and a looming advertising downturn, we think Pro7 should cut its dividend to ease the FCF outflow requirements and allow investments in the core business. We thus cut our dividend forecasts by 51% (to €0.52/preference share). On our new estimate, the dividend would be 2.5x covered. Dividend yield is 8.7%,” says the note.

“The risk of seeing Prosieben's long-term trading and/or assets be put at risk to satisfy ordinary shareholders' interests is, however, very low in our view,” says the bank. However, “the lack of clear leadership constitutes an additional concern as trading conditions get harsher and the SBS integration is far from being over.”

“Prosieben is the second-largest commercial broadcaster in Germany, with just over 40% share of a €4.1bn advertising market. The company has created the third-largest online advertising network in Germany and post the merger with SBS now operates TV businesses all across northern, central and eastern Europe. From that point of view, Prosieben has strong geographical and strategic positioning. Moreover, Prosieben’s key market (Germany) is one of the most fragmented in Europe, mostly due to historically high cable penetration, which means that structurally, the group has far less to lose than its European peers. The group is therefore one of better positioned of the European Broadcasters we cover,” says the note.

The broadcaster’s operational attractions are many: “Currently trading on less than 5x PE in 2009e, one could argue that, even following the group’s profit warning in Q108, the stock has fallen too far and begins to offer some good value. Our view on this is that leverage concerns and volatility created by the current equity squeeze aside (tough to exclude as Net Debt is nearly 3x market cap), Prosieben would most likely be a very interesting stock to buy for the long term,” says Morgan Stanley.