Bankers working in the media and telecommunications sector may feel that they have stumbled into El Dorado.
Technology and market forces are speeding up the competition to access America's television sets-from high-definition TV to cable to direct broadcast satellite-while regulatory changes and new pricing structures have touched off an explosion in the number of phone companies.
In this article and three to follow, American Banker will examine how commercial banks and Wall Street firms are rushing to meet the financing needs of this crucial sector of the economy.
The mother lode for investment bankers has been in mergers and acquisitions. Media and telecom is in rapid transition, with consolidations, spinoffs and-some observers predict-the impending convergence of segments. Last year there were 563 mergers in the industry, with a total value of more than $124 billion.
Media and telecom is also the largest segment of the booming junk bond market, accounting for 36% of the roughly $452 billion of outstanding high- yield debt. About a quarter of the $40.1 billion raised in the high-yield market in the first quarter was for media and telecom issues, according to Securities Data Co.
Junk bonds are particularly attractive to two of the hottest segments of the telephone industry-wireless service providers and new local competitors-because both are dominated by start-ups.
Together, these segments account for about 10% of outstanding junk bonds, according to Les Levi, who analyzes high-yield media and telecom issues for Chase Securities Inc.
But some industry observers think the high-yield market may be benefiting at the expense of commercial banks.
"The aggressiveness of high-yield buyers has left some bank facilities (in this sector) unused," said Thomas V. Reifenheiser, a managing director at Chase Securities in charge of the global media and telecom group.
Though syndicated and leveraged lending for the sector totaled $104 billion last year, some companies have begun replacing their bank debt with junk bonds, according to Mr. Reifenheiser.
"We have some cable television companies that have no bank debt, and that was a business that once depended almost exclusively on bank debt," he said.
Meanwhile, the sleepy market for new issues of media and telecom stocks may be waking up. Last year, 62 media and telecom equity offerings raised just under $9 billion, a 23% decline from 1996. That may pick up with a new interest in media and telecom reverse buyouts-IPOs for companies previously taken private by leveraged buyouts.
But the sector is not bulletproof. The high-yield market gobbled up about $2 billion in junk bonds for wireless cable companies two to three years ago, according to Mr. Levi.
These companies tried to compete with cable and direct broadcast satellite by using a more cost-effective, land-based transmitter. But technical problems, such as poor reception during rainstorms, have hindered their efforts. As a result, their junk bonds are trading at distressed levels today, Mr. Levi said.
The hottest part of the telephone segment, cellular service, seems to be reaching critical mass.
The technology drew 13 million new subscribers in the United States last year and 10 million in 1995 and again in 1996, according to Jeff Hines, a BT Alex. Brown analyst of wireless communications.
"The start-ups last year actually helped expand the pie," Mr. Hines said. "New competitors came in at lower prices with state-of-the-art cellular, and that all had the effect of expanding wireless growth in the U.S. market."
Chase's Mr. Levi said much of the cable industry's outstanding junk bonds, which are 4.5% of all high-yield debt, went to finance capital expenditures for upgrading networks to digital.
Most observers agree that phone companies have an edge in the battle to provide Internet access, because most cable companies cannot send data both ways.
David Gilson, a media and telecom analyst with Bank of America, said cable companies could ultimately deliver more bandwidth, or volume of data, at a lower cost. "But it's an incremental business and I think each side will get its fair share," he said.
Though cable subscriptions have grown, broadcast TV and radio reaches many more people.
The 1996 telecommunications act, which relaxed some of the restrictions against cross-media ownership in the same market, has spawned a wave of consolidation.
The act allowed local TV stations in the largest markets to own as many as eight radio stations - double the previous maximum-in the same market. Broadcast outlets represent about 3.3% of outstanding junk bonds, some of which helped finance these deals.
The much-ballyhooed high-definition TV will also be ushered in this year.
The federal government gave the long-awaited technology a boost last April when it gave established broadcasters free licenses for digital transmissions.
The bonanza, worth an estimated $70 billion, left some TV stations with an embarrassment of riches. For one thing, the high price of upgrading- roughly $9 million-means that only stations in the top 10 markets expect to go digital by yearend, when the first high-definition sets are due in stores.
The hefty prices of these sets, $5,000 to $10,000, mean that stations probably will not be reaching many people-or generating much advertising revenue-until the technology becomes more widely accessible.
But broadcasters can also split the airwaves to send out more channels of average quality that can be viewed on today's TVs.
Once these companies go digital, some may try to compete with phone companies and cable operators to provide Internet access.
All of the changes in electronic media were supposed to kill box office sales at movie theaters.
But revenues from ticket sales have skyrocketed, and so has the buyout community's interest in cinemas.
"There are not a lot of capital expenditures, and the steady revenue stream allows you to pay down debt reasonably quickly," Mr. Gilson said. "Also, there's a trend toward multiplex theaters. So if you build a newer, hotter theater in a good market, you can take away market share from old players."
Over the years, many dire predictions have been made that new technologies in media and telecom would eliminate their predecessors.
But most discoveries have just added to the bonanza.