The recent injection of R500 million into Primedia by its shareholders
is the strongest indication yet of the tough trading conditions in the
media industry and that some of the high-profile private equity deals
of recent years may have hit a rough patch, writes Thabiso Mochiko in Business Report.

The company was delisted last year after it was bought for R6 billion in a private equity deal by a consortium including Brait, the Mineworkers Investment Company (MIC), management and the Kirsh family.

In deals of this nature, buyers typically borrow up to two-thirds of the purchase price – debt that is piled on the firm they buy. Funders of this debt impose debt covenants, including financial benchmarks the borrower must satisfy during the term of the loan.

Such benchmarks, on which the borrower must report regularly to the funders, include ratios of borrowings to equity and cash flow to debt payments.

Primedia, whose assets include Talk Radio 702 and cinema chain Ster-Kinekor, said last week that the "changing economic circumstances" made it imperative for the company "to restructure" its capital.

The company did not elaborate, but sources in the private equity industry said the announcement meant Primedia had breached its debt-to-equity ratio covenant. Such a breach would arise if Primedia had run up losses in recent months, which would have reduced its equity, making it necessary for shareholders to pump more money into the company.

Sources said that it was also possible that Primedia's bankers had become twitchy given the slowdown in economic activity and the rise in bad loans in the banking sector. The media industry is one of the early indicators of a slowdown in economic activity as companies slash advertising budgets to trim costs. Primedia generates about 80 percent of its profit from advertising-related businesses. The balance comes from its entertainment operations.

Click here to read the full report, posted on Business Report's website.