Industry giants raised capital in 2020 in anticipation of a big financial hit — and now executives are deciding where and how to invest.
Shuttered cinemas, closed theme parks, lower advertising spending — one year ago, the realization sank in across Hollywood that the pandemic would cause a hit to earnings and cash flow for an unknown duration. At the time, entertainment giants pivoted to raise capital and started preserving cash by freezing stock buybacks or dividends, and drawing up plans for cost cuts and layoffs. As ratings agencies handed out downgrades, debt burdens and cash war chests moved into Wall Street’s focus.
Now, in the wake of those decisions, the industry’s balance sheets are showing higher debt-to-earnings ratios. But that may not be worrying executives. Wall Street observers say most entertainment giants are in solid financial positions despite higher debt and express hope that the worst pain of the pandemic is in the rearview mirror for the sector, with vaccine availability expected to greatly increase by May. Investors have now zeroed in on where Hollywood firms will choose to put their money, beyond investments in their streaming services.
“At the beginning of the pandemic, all companies, from smaller ones all the way up to Disney, were concerned about liquidity. So they issued a lot of debt to build up liquidity,” says S&P Global Ratings analyst Naveen Sarma. “Now the question becomes, ‘You are sitting on all this cash, what do you do with it? Do you pay down debt, use it on M&A, do you buy back stock'?”
For example, Disney ended 2020 with $17.1 billion in cash, cash equivalents and restricted cash, more than twice the $6.9 billion reported for the end of 2019; Comcast ended it with $11.8 billion, up from $5.6 billion.
"As business snaps back due to pent-up demand as capacity and strict social distancing rules get released, we believe that leverage metrics will improve dramatically through 2022,” Moody’s analyst Neil Begley tells THR.
But paths will differ. "The leverage constraints and outlook for recovery will vary for each company based on their respective financial choices, portfolio composition, and the pace of the broader secular changes," says CFRA Research analyst Tuna Amobi. He expects companies to "increasingly focus on de-leveraging and reinstate other capital allocation priorities while also pursuing their streaming ambitions and related investments."
Indeed, the most recent earnings season featured executive vows to reduce debt and much discussion of investments in streaming growth. But Comcast also delighted Wall Street by unveiling plans to restart stock buybacks in the back half of 2021, drawing praise from analysts.
And Disney recently said it would reinstate dividend payments, suspended due to the pandemic, in an unspecified time frame. "We don’t think that any of those companies have issues with liquidity,” says Sarma, who notes that many newer streaming businesses are expected to produce cash flow losses for several years. “These companies have this secular issue of declining television and studio revenue and cash flow. So you will have cash flow and credit measures worsen until they get to an inflection point.”
AT&T has faced more immediate questions after agreeing to spend a higher-than-forecast $27 billion-plus on 5G spectrum and related wireless expenses. The FCC spectrum auction “puts pressure on AT&T’s balance sheet while their metrics are already stretched due to COVID-19,” echoes Moody’s Begley, but he has also said that a recent deal to divest a 30 percent stake in the firm’s DirecTV and other pay TV businesses “is moderately credit positive for AT&T.”
Incoming AT&T CFO Pascal Desroches told investors March 12 that, with the help of recent asset sales, “our liquidity position and anticipated cash flow allows us to continue to distribute nearly $15 billion in dividends” while paying back “a significant amount of our debt.” And outgoing CFO John Stephens has said: “I see a path to $20 billion of free cash flow after dividends.”
Debt concerns remain top of mind in the cinema sector. Take AMC Theatres, the largest global exhibitor. “There’s enough cash to get through 2021, but the price of achieving liquidity was steep,” wrote MKM Partners’ Eric Handler, who rates the stock a “sell,” in a March 11 report. In addition to “the significant debt load of $5.7 billion,” Handler noted “the overhang of $450 million of deferred rents, which will need to be gradually repaid over the next few years.”
Wedbush analyst Michael Pachter also highlighted the longer-term challenges for AMC, which began reopening theaters in Los Angeles on March 15: “The company has sufficient liquidity to allow it to survive with low utilization through at least the third quarter,” he wrote, adding that “it will take AMC years to repay its debt burden, and longer until it is able to revisit its growth strategy.”
This story first appeared in the March 18 issue of The Hollywood Reporter magazine. Click here to subscribe.
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