High-yield media analysts say investors should not jump to add exposure to television and cable broadcasters following last week's decision by a U.S. Appeals court, which is widely expected to encourage industry consolidation. Steve Schutzman, Salomon Smith Barney media analyst and anInstitutional Investor 2001 All-America Fixed-Income Team second-teamer, suggests investors take gains on Young Broadcasting 10% notes of '11 (B3/B-) and the Sinclair Broadcast Group 9% notes of '07 (B2/B). The Young paper was bid at 97.5 last Wednesday, while Sinclair's bonds were bid at 103. Both companies are candidates for consolidation, but Schutzman says that asset sales do not always benefit bondholders. Young, for example, will use only a fraction of the proceeds from a recent asset sale to reduce leverage. Shutzman says that while junk broadcasters continue to benefit from defensiveness on the part of portfolio managers, current bond prices are higher than huge debt levels and high fixed costs would seem to justify. He declines comment on how low the bonds may trade.
In the decision, the court ordered the Federal Communications Commission to reexamine a rule prohibiting television broadcasters from reaching more than 35% of the national viewing audience. It also struck down a rule barring a company from owning a cable system and television station in the same market.
UBS Warburg's Aryeh Bourkoff, the top II-ranked high-yield cable analyst, says no significant M&A activity is likely until the end of this year at the earliest. Nonetheless, Bourkoff sees the decision as evidence of an increasingly relaxed regulatory environment for the industry, which should ultimately help cable companies defray some of their programming costs as they merge with advertisers and television broadcasters.