After Crunch Time
During the past three Junes (2005-07), I chronicled the acquisition boom in residential housing and media corporations, awed at the easy leverage available and the inevitable angry aftermath. In two of those columns (’05-’06) I recalled the Credit Crunches of 1979-80 and 1990-93, which have now been joined by a third, which officially began in mid-July. Knowing what happened before is essential to understanding what may happen next. History again is being repeated, probably not for the last time.
Jimmy Carter’s Crunch cost him his job and it took more than four years for a new bull market to start in 1985. The Crunch of George H.W. Bush cost him his job, too, and it was another four years until the bulls roared again in 1997. This time, the two-term President Bush won’t be in another election, and if he loses his job before then, it won’t be over the Crunch. Regardless, there’s too much idle capital to wait four more years for the running of the bulls. And money-pumping actions by central banks worldwide have helped salve investor wounds. But in the final analysis, scale still matters in cable, and more scale will be achieved. There is too much pent-up capital chasing too few available assets.
For the record, the five-year joyride of 2002-2007 hit a brick wall July 20, when the valuation of U.S. securities backed by subprime mortgages suddenly plummeted, causing investors to panic and throw away unrelated issues. And though it was the Fed (Paul Volcker) that executed Jimmy Carter’s credit squeeze, and the Comptroller of the Currency (Robert Clarke) who took the rap for George H.W. Bush’s wildfire, this time the arsonist was the market itself — so overloaded with artfully-crafted paper it finally struck the match on its own. The initial result, though, was the same as in 1990: lenders, who usually "circle" loans when they’re approved, circled their wagons instead. They simply raised the cost of borrowing to make corporate buyers think twice, or not at all, about doing deals. But mergers are now an integral part of the financial mechanism. They’ll be back, just at lower valuations than prior peaks.
In the cable industry, the immediate impact this time was felt by The Carlyle Group, unable to buy Virgin Media in the U.K. (the bid was real, the buyer was rumored). Then, in August, Morgan Stanley withdrew its offer to finance Carlyle’s sale of Insight Communications. Insight is a poster-child by the numbers: the financing was reportedly first pegged at 9.25x cash flow, then 7.5x and then 0.0x. In the wake of the last big Credit Crunch, 10-12x multiples were buried and financing life reverted to ultra-conservative levels of 5-6x. By this October public cable stocks were down to 6-7x. In finance, as in everything else, the trend always reverts to the mean. Thus the crash in cable shares on Oct. 25, spurred by fear of competition, set the stage for eventual, further consolidation. Lenders are crunching credit this year, but money managers and those who acquire still are crunching their numbers.
Analyst/investor Paul Kagan is chairman/CEO of PK Worldmedia, Inc., in Carmel, Calif. He owns shares in Virgin Media and was an Insight shareholder when Carlyle took it private. Information in his columns is not intended to be a recommendation to buy or sell securities
