Media Companies to Fed: Tarp Me!

Media and electronics executives, whose balance sheets rely on collapsing consumer and advertiser spending, can hardly be blamed for lining up behind the big three automakers screaming "Tarp Me!"

The federal government's surprise decision to broaden the scope of its $700-billion bailout to include "non-bank financial institutions" (rather than buy troubled mortgage assets) and to ask Congress for another facility to buttress the $1 trillion asset-backed consumer lending market, opens the door to needy companies. If you are critical to consumer well-being and the flow of credit, you may qualify.

Or alter your business model to become a "bank," like American Express (AXP) and GE Capital (GE) did this week, receiving regulatory clearance to qualify for tarp fund infusion. Who else qualifies as "too big to fail"? Treasury Secretary Henry Paulson raised more questions than he answered Wednesday about the changed tarp rules, amid signs that everyone everywhere is in trouble through 2010.

Best Buy (BBY) CEO Brad Anderson said he expects comparable-store sales to decline 5% to 15% in the four months remaining in its fiscal year. "Since September, rapid seismic changes in consumer behavior have created the most difficult climate we've ever seen," Anderson said.

It was an unnerving reminder of why its biggest rival, Circuit City (CC), filed for bankruptcy earlier this week–claiming $3.4 billion in assets against $2.32 billion in liabilities, with the difference well below what it collectively owes its vendors. With retailers bracing for the same, other Chapter 11 filings are expected during the depressed holiday season–expected to be the weakest since the early 1990s. Consumer debt is at 100% of negative GDP. Some 60 economists surveyed by Bloomberg News said this is worst financial crisis in seven decades.

Gawker's Nick Denton is forecasting that stressed companies will cut back as much as 40% on their traditional and online advertising next year, even as Wall Street continues its almost-daily modest reductions in earnings and revenue estimates for advertising and media, entertainment and tech.

The crushed newspaper business–the worst of all sectors with more than a 16% decline in revenues this year and at least another 13% decline in 2009–would be a candidate for "tarping." Or how about the United Bank of Broadcasters, whose analog signals get yanked in three months? Most of the hardware gadgets that brought consumers to the broadband party are hurting, too.

The Consumer Electronics Association this week predicted that holiday sales will fall sharply, struggling to top last year's 12% gain over 2006 with a marginal 3% growth if the economy does not tank any further. Automobile video systems, navigation and games are the only sure growth sectors. Little wonder, then, why Apple (AAPL) recently curbed its fourth-quarter iPhone production to fix its iPhone and iPod screens on new video-game software instead.

What that means is that the digital revolution will continue to roar ahead though this economic downturn, courtesy of interactive mobile devices, televisions, computers and smart phones that consumers already own. That is the single most-obscured incentive for companies to continue to innovate and develop a new silver lining for revenues. After all, the depth of corporate debt and potentially destructive looming loan commitments has barely come to light.

Pali Capital analyst Richard Greenfield Wednesday reported that Sumner Redstone's private holdings company National Amusements is preparing to sell its movie theater assets to meet a $1.6 billion loan obligation triggered by the plummeting price of collateralized Viacom (VIA) and CBS (CBS) stock that it controls. Because NAI still would have its own debt to service, Greenfield says the best strategy would be for Redstone to sacrifice his "most saleable asset"–Viacom–valued at $12 billion. Redstone says he refuses to sell either CBS or Viacom; Greenfield says he may "no longer have a choice."

The savvy octogenarian, known for getting himself out of tight spots, simply has to make the case that entertainment is integral to the stability of the nation's financial system and the flow of funds. The equity promised to Viacom and CBS shareholders when the companies split is a long way from being delivered, even for majority owner Redstone. So maybe he's not a candidate for declaring himself a bank.

However, the most brilliant minds in media and tech need only consider moral hazard. The economic concept now includes bailing out badly managed firms that were burnt by their own risk-taking when the bottom fell out of a high-flying, easy-money market left to its own devices.

The question is where the government, persuaded by strategic business thinkers and lobbyists, will draw the line. Which companies will be lucky enough to get under the tarp? And will any provide the ultimate relief needed to restore consumer and advertiser spending?

Comments

[Timseekinga...:]

You mean "with the difference well ABOVE what it collectively owes its vendors"; CC's owes far LESS collectively to its vendors than the amount available to it under its DIP credit line. You should proof read your stuff before publishing it as "news!"

2008 Nov 14 10:01 AM

[Timseekinga...:]

Circuit City, in fact, has about $5.00 equity per common share RIGHT NOW! And I fully expect that it will retain a good portion of that by the time it emerges from bankruptcy protection next year; in fact, it appears that the company will issue warrants to its current common shareholders rather than void its existing common stock, and when that happens, existing common shareholders will receive stock that should be valued between $2.50 and $4.00. So this is shaping up to be an excellent "short term" play, and I am holding my 20,000 shares long.

2008 Nov 14 10:06 AM

[Timseekinga...:]

Circuit City has about $5.00 equity per common share RIGHT NOW! I expect the company to emerge from bankruptcy protection next year with a significant portion of that equity intact. Given this reality, I anticipate that CC will issue warrants to existing common shareholders rather than void its stock, and in so doing, existing shareholders will recover nicely (and some will make a great profit). I am thus holding my 20,000 shares of Circuit City common stock LONG.

2008 Nov 14 10:10 AM

[billddrummer:]

Tim,

CC hasn't got that kind of equity. The reports from the bankruptcy filing were based on the 8/31/08 financial statements.

NOW, CC has $898 million owing on its DIP facility, according to the WSJ. The filing listed $292 million in outstandings against the prior asset-backed credit facility, but they've drawn it up to $898 million because of the massive cash burn rate over the past 3 months.

You may find yourself with some useless common. But that's just my opinion.

2008 Nov 14 01:11 PM

[phil'spal:]

i'll have to second bill's outlook. CC was in bad shape going into BK. the DIP funding is just a stalling tactic. sure, they'll close some stores, fire some people, but the money pit will continue to do it's job of swallowing heideous amounts of cash. the consumer electronics industry is bracing for the worst year in memory. CC suffered from lack of traffic before and there's no reason to think that anything will change. what catalyst am i not seeing that's going to make everything all better in the new year? is the economy and the customer sentiment and the management style and the competition's execution going to all at once change in their favor? BBY and WMT are guiding down, but their customers arent worried about them still being around after new year. CC is getting inventory shipments now. the bugaboo they're faced with is that they have to sell it. at a profit at that. the bigger players are expecting to fight the mother of all price wars to get their share, so profit margin will be the main casualty. CC can scarcely afford much if any margin contraction. they are not equipped to battle in that arena.

sorry, but WMT and BBY beat them. they wont emerge from bankruptcy. when they've used up the DIP bucks, the courts will summon CC's accountants to ask one more question: "if you have 11 chapters and we take away 4 of them, where does that leave you?"

2008 Nov 14 08:24 PM

[billddrummer:]

phil,

Well said, and spot on!!

In answer to a question you posed some time ago, I live in Reno, NV.

The CC that is closing is in Sparks, a town just east of Reno. It's just over 2 years old, and competed with the BBY I work in for CE business. New mall with standard mix of anchors and line stores (Old Navy, Michael's, PetSmart, Home Depot, Costco, Sports Authority, etc.).

Last week we learned that no more deliveries would be going to the closing store, and discounts started at 20%.

This week the discounts went to 30%. The sign wavers are on every corner.

Since the same company is handling the Mervyn's liquidations here, the signs look identical. Only difference? Mervyn's is now discounting stuff by 80%.

I believe they need to be done at year end as well.

CC's Reno store is in a poor location with terrible access. The Sam's Club parking lot is usually packed. The CC parking lot is usually empty.

(This mall isn't an SPG property.) I'm reasonably confident that CC will attempt to renegotiate the lease. But I don't think it will work. And I also don't think another big box retailer would want the space because it's too hard to get to.

I see nothing but another 556 empty buildings after the holidays. And that doesn't sound like $5/share in value to me. More like $0.

But it's trading at a dime now, so the downside risk is minimal.

2008 Nov 17 12:03 PM