Citigroup has warned that the Australia media industry faces the “worst advertising downturn in 40 years” and that major players like PBL Media, Ten Network, PMP and Seven Network will “trade at a loss through the cycle”.

It also warned that attempts to sell assets will result in big discounts and problems because of locked up credit markets. Profits won’t hit bottom until 2010, which is further out than previously thought.

In a note to clients, released today, Citigroup analysts make it clear that the local media groups are in for a pounding next year. It warns that the trading losses incurred by some groups “could lead to structural changes in ownership or capital.”

“We forecast TEN, PMP, SEV and PBL Media to trade at a loss through FY09e and FY10e. This could necessitate change of ownership or equity contributions, and implies that financial viability may be at risk,” Citi said in its 53 page report.

We have already seen the burst of speculation about the financial position of PBL Media as CVC Asia Pacific seeks up to $3900 million in new capital to maintain its agreements with the 60 banks funding the $4.2 billion in debt.

James Packer and John Alexander abandoned PBL Media to its own defences last month by stepping down from the board and categorically ruling out any chance Consolidated Media, 38% owned by Packer, would contribute any new capital.

Citigroup said this morning that “Profit warnings (are) starting to flow — of the four media sector profit downgrades last week (PMP, APN, SKT and SEK), three imply the advertising outlook is deteriorating much faster than originally expected.

News Corp also downgraded its worldwide earnings and pointed to lower revenues and profits from the Australian papers. Rupert Murdoch said job ads at News’ Australian suburban papers were weak. News Corp’s commentary pointed to weaker job advertising and lower circulation revenues at its papers.

The Seven Network confirmed yesterday that it was expecting first half profit to be down “around 50%. Previously it was in a range of 40%-50%. Seven made no forecast about the rest of the financial year.

On Thursday, Fairfax Media holds its AGM in Melbourne and the market is expecting another downgrade for its 2009 performance.

Citigroup described 2009 as “Make or break for the media sector” and that profits will not reach a trough until the 2010 financial year, meaning over two years of more painful adjustment and cost cutting, or losses:

Total 2009 advertising expenditure to decline 8.8% – In looking at the downturns of the early 1990s and early 2000s we now make one simple assumption: the worst of history will repeat itself. Further downgrades necessary – After materially downgrading forecasts in May and October, and despite being below consensus for the majority of 2008, we again downgrade estimates. We now forecast media profits to trough in FY10e and are now 48% below FY10 consensus.

Citigroup said that attempts to sell assets to raise cash and cut debt could strike problems.

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