Montreal: The economic and equity downturn has taken a major piece out of Canadian television broadcaster share prices. Analysts say the decline is in anticipation of a reduction in consumer spending and a claw-back in advertising sales in 1999.

Broadcaster share prices on the Toronto Stock Exchange are off more than 40% from their recent high, while an executive with Canada’s largest media buyer says this fall’s healthy climate for tv airtime sales has evaporated.

‘The [TSE 300] market is off about 32% from its high,’ says Scott Cuthbertson, equity analyst, TD Securities, Toronto. ‘If you look at the main television broadcaster stocks such as Baton, CanWest, chum, they are off 40% plus.

‘There’s a very high degree of correlation between television advertising spending and consumer spending and gross domestic product. The bottom line is that when the economy turns down, advertising spending basically stops growing. There tends to be about a six- to 12-month lag before it really kicks in.’

Advertisers cautious

Ann Boden, president of McKim Media Group, Toronto, says a wave of caution has overtaken tv airtime buyers following a ‘very healthy’ situation which seemingly came to an abrupt end in mid-September.

‘People bought early and it was a lot more optimistic a few months ago than it is now,’ she says.

Boden says the downturn hasn’t exactly hit yet, but ‘people [advertisers] are very cautious about going into next year.’

‘We’ve seen it in a number of sectors, and I think on the broadcasting side it’s usually about six months behind a lot of the other areas that have already seen a downturn.’

Among the Canadian Association of Broadcasters’ main broadcast group members, the price for Baton Broadcasting stock has declined almost 44% from a high of $26.20 to a low of $14.75 (in mid-October); from a high of $28.25 to a low of $16.80 for CanWest Global; and from $60 to $35.75 for CHUM Ltd.

‘[chum’s] 52-week low is actually $27, but that was almost a year ago before it went up [very quickly],’ says TD Securities’ Cuthbertson. ‘But really what we’re talking about here is how the stocks have been hurt by the correction.

‘Group tva hasn’t been hurt nearly as bad. It’s gone from a high of $15 to a low of something like $11.75,’ he says.

Boden reports fall cutbacks and cancellations are no more than ‘a normal part of the business,’ but says the situation is being exacerbated by the plunge of the Canadian dollar, the impact of uncertain foreign markets on multinational companies, and by hesitant Canadian clients who report to u.s. multinationals in u.s. dollars.

‘These things happen but I don’t think that’s the major thing,’ she says.

Boden says broadcasters are unsure of what the crtc has in store. ‘I think the crtc is creating some uncertainty.’

Added to the uncertainty, specialty channels continue to make important gains at the expense of conventional tv broadcasters, and ‘all of these factors are at work, it’s not one thing,’ says Boden.

Highly leveraged

With the first hint of economic downturn, Cuthbertson says investors tend to bail out fairly quickly because profits will drop in the months ahead and because broadcasting in Canada is highly leveraged with significant fixed costs.

‘The other side of the coin is that when the stock market turns down, people look for stocks that are defensive, big cap stocks and stocks with high dividend yields, and stocks with aren’t very sensitive to economic cyclicality,’ he says.

‘Frankly, a lot of producers tend to view broadcasters as huge, rich companies [but] the entire broadcast sector runs maybe 3% of the entire TSE 300 and they are not viewed by most investors as being core investments in a lot of portfolios,’ says Cuthbertson. ‘If it looks really hot they’ll jump in for awhile. It’s not something that they can’t do without.’

The industry’s fundamentally new structure, characterized by new licences and merger and acquisition authorization, places broadcasters in a better position to manage a downturn, but Cuthbertson says investors who were along for the ride have been cashing out.

‘ `Okay, I’ve had a hell of a good ride here. These are not very defensive stocks, not very liquid stocks. They are going to start to flatten out after tremendous gain. It’s time to get out of here.’ That’s essentially what has happened,’ he says.

Going forward, Cuthbertson says broadcaster access to cash or credit will be limited, or at best, extremely expensive.

‘If the crtc were to force broadcasters’ hand, obliging them to invest more money in lower-return programming investments, then this will exacerbate the flight from their stocks and cut out their access to capital. It’s already pretty bad, but that will put the nail in the coffin.’

As it stands, Cuthbertson says broadcasters cannot go to the equity markets. ‘It won’t get done and the debt markets [public bonds] are pretty much the same way. That market is a mess, too.’

In 1997, English-language broadcasters spent $47.5 million on Canadian drama, music and variety programming while earning $1.33 billion in advertising revenue, or approximately 3.6% of revenue.

According to a study prepared by PricewaterhouseCoopers done for the cab, if broadcasters are required to spend 7% or 10% of airtime revenue on the underfunded categories, as proposed by the Directors Guild of Canada and cftpa, they would have to annually spend an additional $46 million and $86 million, respectively

‘The dgc and cftpa proposals would result in tonnage, not quality domestic programming,’ says cab president and ceo Michael McCabe. ‘There isn’t enough money in the system to support such a dramatic increase in hours. These plans will make producers and directors richer, they won’t help us tell Canadian stories.’

‘I would think it would be a much healthier environment if there was a greater degree of risk-taking such that there could be a more equitable share of the risk between the two [producers and broadcasters],’ says Cuthbertson.

‘If we work together, broadcasters and producers, to find a way to get more Canadians watching Canadian programs. . . it probably means more people around the world would like to watch it, and that will make those programs more marketable to the u.k., Australia, and even the States. And then more money comes in to both the broadcasters and the producers.

‘It helps the crtc get the message across and everybody wins. And we get weaned off government support [which] long term is not healthy. It weakens the industry.’