NZ Venture Capital Association chairman Kerry McIntosh says bank appetite for leveraged deals is back

By Gareth Vaughan

TV3 parent MediaWorks is trading "well within" its banking covenants, its owner sees good upside from an advertising market recovery, and has no plans to sell in the short-term.

Kerry McIntosh, New Zealand operating partner for MediaWorks owner Ironbridge, told interest.co.nz in a Double Shot interview that after MediaWorks' capital restructure a year ago, bank debt was now in the "high NZ$300 million" range, down from more than NZ$550 million, the banking covenants had been reset and the business was trading "well within" those despite a weak advertising market.

"We think there’s good upside there, particularly from the recovery in the (advertising) market, and we’d like to capture that," McIntosh said.

Also chairman of the New Zealand Venture Capital Association, McIntosh said private equity was back with the market becoming "much more active."

"There are a number of reasons for that," added McIntosh. "The banking markets have opened up and leverage is available again to the private equity funds. I think vendors have realised market conditions are what they are, they’re not going to get any better."

Private equity investment in New Zealand of NZ$170 million in the first-half of 2010 was the highest investment level since the first-half of 2007. Although there haven't been any big deals this year, McIntosh noted these had returned to the Australian market with the A$2.7 billion takeover led by Carlyle Group of hospital operator Healthscope and Kohlberg Kravis Roberts & Co's ultimately unsuccessful A$1.75 billion tilt at fund manager Perpetual.

McIntosh said he had "no doubt" that if big buyout opportunities arise in New Zealand, there will be private equity interest. But the major focus over the next couple of years was likely to be exits.

"The bulk of the larger transactions in New Zealand were done in 2006 and 2007 and I think a lot of the private equity firms will be looking for liquidity events in the next two or three years. Some of those assets that private equity are holding, like Tegel and Independent Liquor will gradually come to market," he said.

Banks 'expensive'

Meanwhile, McIntosh said bank funding was now expensive compared to where it was at the height of the boom in 2006 and 2007.

"In the boom times you might have been paying 2% up front with a margin of 2-3%. The transactions that are being done now are being done at a 4% up front fee and a 4% margin so obviously you need a better return profile to pay for those type of banking rates."

He said banks had fed off on restructuring fees over the past couple of years but with those restructurings ending, that source of fee income had dried up.

"And the banks really have looked around for other sources of fee income and lo and behold, there are their old friends private equity," said McIntosh.

There had been a "real thaw" with "real appetite" for leveraged deals again. However, the debt to earnings before interest, tax, depreciation and amortisation (ebitda) on offer was up to 4-4.5 times, similar to what was on offer between 2001-2005, but down on the 6-7 times debt to ebitda in 2006 and 2007.

"Looking back, with the benefit of hindsight, those multiples were too high in general," said McIntosh.

Between 2005 and 2007 overseas private equity firms, flush with cheap credit, rode into New Zealand, buying everything from Yellow Pages Group from Telecom, MediaWorks, the late Michael Erceg's alcopops empire Independent Liquor, EnviroWaste and window provider Metro GlassTech, the latter after outbidding Fletcher Building by NZ$100 million on a NZ$366.2 million deal.

The private equity firms funded about 75% of the purchase price through debt and dropped this on the acquired firm's balance sheet planning to use its cashflows to make interest payments. This has proven tricky given the high prices paid and the recession, which stalled or shrunk the earnings of many of the purchased companies.

The banks who lent NZ$1.5 billion to help fund the March 2007 NZ$2.24 billion purchase of Yellow Pages by Unitas Capital and Teachers’ Private Capital - the private investment arm of the Ontario Teachers' Pension Plan - in New Zealand's most high profile leveraged buyout, are set to crystallize about NZ$1 billion of losses with the shareholders' interests wiped out.

Holding MediaWorks and EnviroWaste

Meanwhile, last year's restructure at MediaWorks, which also owns C4 and a series of radio stations including Radio Live, The Rock and More FM, saw NZ$70 million of equity tipped in to repay debt, reset fixed interest rates swaps and provide ongoing liquidity. As part of the restructure, Goldman Sachs converted debt to equity giving it a 12.9% stake.

Ironbridge bought a 70% stake in MediaWorks from Canada's CanWest Global Communications in 2007 and acquired the remaining shares from minority investors including Brook Asset Management and delisted the company from the stock exchange. The Australian private equity fund borrowed much of the money to fund the deal, which was valued at about NZ$790 million, mostly from ABN Amro, Royal Bank of Scotland and BOS International.

After a NZ$257.8 million goodwill impairment charge, MediaWorks posted a NZ$314.4 million loss for the financial year to August 2009. This year's results aren't yet available.

McIntosh said the major issue facing MediaWorks, and the rest of the advertising dependent media, was the trajectory of the recovery in advertising spend in New Zealand. This had been "very flat" compared with Australia, where free to air television advertising spend in Sydney was now back to 2007 levels or even above.

"Whereas in New Zealand we’re still a way away from that."

In Australia television, magazine and digital media group Nine Entertainment, owned by private equity group CVC, is expected to float on the sharemarket during the first half of 2011, something that Ironbridge's team will no doubt be watching closely.

Within the broader local environment McIntosh said MediaWorks had performed very well. For the August 2010 year it was "well ahead" of the group's base case forecast. McIntosh said, however, the advertising market had regressed since perking up before the October 1 rise in GST to 15% from 12.5%.

"I think that turned out to be largely a pull through from the GST increase and I think a lot of businesses have really struggled in October and November and we’ve seen that reflected in ad spend," said McIntosh.

"Certainly some of the signs are pointing to a stronger 2011 and we’re looking forward to that."

He said Ironbridge also planned to hang on to its other New Zealand investment, EnviroWaste Services, for a while yet.

"We still see plenty of value upside and we still see significant improvement in earnings in both those businesses," McIntosh said. "So we certainly wouldn’t be looking for a liquidity event in the near term in either of those businesses."

Ironbridge bought waste services firm EnviroWaste, which is now chaired by former Waste Management managing director Kim Ellis and whose prime asset is the Hampton Downs landfill in the Waikato, for about NZ$365 million from Fulton Hogan in December 2006.

The latest annual accounts from EnviroWaste's parent company show bank borrowings of NZ$202 million maturing in 2012, a net loss of $10.5 million down from NZ$21.7 million last year, leaving an equity deficit of NZ$16.4 million. However, revenue rose 21% to NZ$133.4 million and earnings before interest and tax climbed 17% to NZ$25.9 million.

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