Setanta hoping for extra time reprieve as debts pile up

THEY’RE one nil down and time’s nearly up. Cash-strapped broadcaster Setanta needs to find just over €100m to meet its short-term obligations to the Premiership and the English FA.

Despite ongoing negotiations, it’s reported that the English Premier League has refused Setanta an extension on the £60m (€67m) instalment due this month under the terms of its contract to broadcast Premiership matches live. Add in the £35m (€39m) that the English FA is expecting by this Friday, and Setanta has a serious problem. While the company maintains that there is no prospect of default, it’s difficult to see in the current climate where it’s going to find the cash.

Things started to go wrong for Setanta in February, when the Premier League contract came up for renewal. In advance of negotiations, Setanta had been working very hard behind the scenes to accumulate the kind of funding necessary to secure the lion’s share of broadcasting rights. This was never going to be easy.

For a start, the Irish broadcaster faced competition from a who’s who of media heavyweights, from the Disney-owned ESPN to BT, BSkyB and the BBC. On top of that you had the hyperinflation that has characterised rights negotiations in recent years. In building a war-chest to enable it to compete with the big boys, Setanta reportedly sought a combination of new equity and additional debt.

But whatever measures were taken, it wasn’t enough. The company managed to secure only 23 of the 46 matches on offer. Not bad on the face of it, given the opposition, but Setanta’s business model is predicated on cornering the Premier League market.

No surprise then that two of Setanta’s biggest shareholders wrote down the value of their investments in the immediate aftermath of losing that vital exclusivity. Private equity group Doughty Hanson, which owns TV3, and financial services group Goldman Sachs are reported to have written down the value of their stakes in the business to zero. Up until this point, investors like Goldman Sachs, Doughty Hanson, Balderton Capital and Davy private clients had been willing to underwrite Setanta’s losses on the assumption that the company would hit profitability once it achieved the right market share.

The broadcaster made a loss of £114.9 million (€129m) in 2007, and something similar last year, while net debt at the end of 2007 stood at £164.6m (€185m). The investment strategy which could admit these losses during the good times will find them difficult to forgive in the current climate.

Setanta has responded by trying to raise more cash, by slimming down the organisation and, most particularly, by trying to coax better terms from rights holders. They have had some success here. Last week, the Scottish Premier League (SPL) agreed to renegotiate the four-year £125m (€140) deal that they had agreed from 2010.

Talks to secure similar re-negotiations with the likes of Premier Rugby, the PGA and Indian Premier League Cricket have been progressing, but the English Premier League has been holding firm.

The Premier League’s underlying assumption is that if Setanta went belly up and couldn’t deliver on the last year of that deal, the league could secure the same or better terms from another broadcaster.

Because of the business model’s insatiable thirst for cash, the company’s debt position has worsened. Setanta raised €225m in PIK loan notes, €180m of which are due to be paid by the end of next year. The coupon on those notes – 12.5% – seems excessive in the current low interest rate environment.

If the company does go to the wall, it would be a sad end to a noble venture. Let’s hope Leonard Ryan and Michael O’Rourke can grab a winner in extra time.