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February 4, 2009

Tim Weller’s debt mountain: Incisive staggers beneath £400m loan burden

By Peter Kirwan MM blog

Signs of severe stress at Incisive Media: according to the FT, the company breached its banking covenants during December.

Breaching one’s banking covenants: a bit like Pugin’s Gothic parliament, this sounds like a Victorian restyling of a medieval offence that merits terrifying punishment.

The reality is more prosaic: what Incisive has done is to break its promise to maintain profits at a level that its bankers think necessary in order to service the company’s debts.

No surprise, you say?

Well, it’s certainly true that poor old Incisive sits at the leading edge of the B2B downturn. Its portfolio of 100+ print titles is heavily skewed towards financial services, property, IT and the legal sector.

But the debts racked up by Incisive in taking itself private and then buying up a string of rivals are big and very ugly.

The FT suggests that Apax Partners raised 7.5 times Incisive’s earnings to buy the company in 2006.

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Bad enough. But after a string of further acquisitions, in December 2007, Incisive disclosed net debt of £400m. It also reported EBITDA of £38m.

These numbers require some caution. The absurdly high implied ratio of x10 EBITDA probably doesn’t quite reflect reality.

This is partly because Incisive continued making acquisitions during 2007. By December 2007, all of the debt associated with those deals had been loaded on to its balance sheet 

But Incisive’s P&L didn’t reflect full-year contributions of revenue and profit from takeover targets such as American Lawyer and VNU Business Publications.

So things might be a bit better than suggested by Incisive’s published accounts for 2007. But not by much, I suspect.

The main reason for pessimism are the revenue declines that have decimated Incisive’s core markets during the past six months.

By comparison with Incisive, media companies we’re accustomed to thinking of as heavily indebted seem positively giddy with free cashflow. 

Take Informa, currently the object of much debt-related concern. In late 2008, the company’s net debt stood at x3.6 times EBITDA.

According to PricewaterhouseCoopers, European media companies — on average — possess EBITDA/net debt ratios of x3.1.

Alternatively, try looking at the problem this way. Trinity Mirror manages to service net debt of around £425m — only slightly more than Incisive owes the banks — from a turnover of slightly less than £1bn.

Incisive is attempting to manage its debts off the back of turnover that’s a fraction of that size. (The figures aren’t entirely clear, but I suspect that annualised revenues are somewhere in the region of £130m-£160m.)

All of this, of course, is argument based on old numbers. Incisive’s figures for the year to 31st December 2008 have yet to be published.

No doubt Apax Partners has deep pockets and good relationships with its bankers (which – surprise, surprise — seem to include the ever-adventurous Royal Bank of Scotland).

Doubtless, both sides have looked again at the possibility of folding Incisive into EMAP, whose debts are less frightening. According to the FT, Apax may shortly inject more cash into Incisive.

But debts of this size are simply dysfunctional. Doomed to stagger beneath a huge ziggurat of obligations for the foreseeable future, Incisive’s progress will be slow and uncertain.

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