There is a very easy to understand equation at PBL Media, 75% owned by CVC and 25% by the James Packer-controlled Consolidated Media Holdings.

Each month PBL Media has to find and pay $39 million interest payments, or more than $1.28 million a day, seven days a week. It’s remorseless and helps explain the pressures the once high flying Packer media empire’s rump now finds itself in.

It is why there’s now talk of $50 million in cost cuts at PBL Media, with much of that expected from Nine this year, and why there will have to be another $50 million a year in cuts found next year and the year after.

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Why? Because at $39 million a month, the total bill each year is $468 million. In the year to June it had earnings before interest and tax of $463 million, so there’s a small shortfall that will grow because revenues in TV and magazines are shrinking with the slow drop in media sector advertising rates and volumes because of the internet and the slump.

That EBIT figure was earned on revenues of $2.082 billion, meaning costs were around $1.620 billion in the year to June. On that basis cutting $50 million a year should be a snack this year, next year and the year after.

These cost cuts are to generate extra cash to repay debt more quickly, not pay dividends to the shareholders.

The Nine Network stations in Sydney, Melbourne and Brisbane, plus NBN and the affiliation fees from WIN generate around $160 million a year in earnings, magazines get around $260 million, but that is wobbly because of plunging sales and ad volumes caused by those sales losses.

There are earnings from Tikectek and the Acer Arena in Sydney, plus the 50% of website Ninemsn, which is proving to be disappointing as Fairfax Media’s digital business leaves it behind in profits, visits and revenue terms.

Nine operated at a loss in the second half, ACP magazines earned less, with some $266 million of that $463 million coming in the first half (which should generate more income anyway because of the high spending Christmas period for Nine and for the magazines).

But the first half of the 2008 year also included around $50 million in extra revenue for Nine from Government advertising in the run up to the November 24 poll, plus spending by the various parties in the campaign (TV Networks were allowed an extra minute of advertising an hour a night for the 33 days of the campaign). That extra revenue won’t be around this half and other advertisers are pulling back.

Rumours still persist that PBL Media and CVC are due to meet bankers this month for a scheduled discussion.

PBL Media has an estimated $4.2 billion on debt: if that’s the case PBL Media is paying between 8% and 9% on much of its money. But that’s an average.

There are at least two tranches of debt. There’s the senior, well-secured debt and then a further level of mezzanine debt with a higher interest rate.

Bankers say that senior debt is currently trading around 80 cents in the $1 and the mezzanine debt at 60 cents: the debt doesn’t trade publicly.

If that’s the case then it’s the market’s judgement that PBL Media’s debt is at the bottom level of junk bond rating, or a single B or worse.

So on that basis, why has JP Morgan been the most aggressive buyer in the stock this year?

Kerry Stokes is buying for strategic reasons (to make a pest of himself and try and worm his interests into Foxtel/Fox Sports).

Stokes believes that PBL Media’s financial position means it will not be able to afford the 2012 Olympics with Foxtel. Foxtel would willingly put up more money top keep them away from Stokes and Seven.

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Peter Fray
Peter Fray
Editor-in-chief
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