BUSINESS OPINION:It appears that for the time being IN&M will be run for one purpose and one purpose only – to pay down its debts, writes JOHN McMANUS

ONE SENTENCE in the prospectus for the Independent News & Media rights issue jumps out.

It is to be found on page 146 of the 169-page document, in the section setting out the terms under which the company has renegotiated its €745 million bank debts.

It reads as follows: “If one or more persons acting in concert gain control of the Company (control being defined as 35 per cent of the maximum number of votes that may be cast at a general meeting of the Company) a lending bank is not to be obliged to fund further utilisations and can declare outstanding borrowings immediately due and payable.”

In effect what this is saying is don’t even think about taking a tilt at IN&M without the support of the existing banks or with €745 million of your bank finance in position. Given the current state of the debt markets the second option does not seem very likely.

It’s a classic poison pill and makes good sense for the banks given the size of their exposure to IN&M and the not very harmonious relationship between the two big shareholders, Sir Anthony O’Reilly and Denis O’Brien.

Both will see their shareholdings halved to about 14 per cent as a result of the debt for equity swop and related rights issue, but neither is expected to fold their tent either.

It should become apparent pretty shortly if either side has the appetite or wherewithal to rebuild their stakes.

There should be plenty of sellers if they are, as the group’s bondholders – who will end up with between 46 per cent and 75 per cent of the group – are not likely to be long-term holders.

If anything the bank’s poison pill favours the O’Reilly faction as they would appear to have the support of the banks and the bondholders, for the time being, having seen off several attempts by O’Brien to effect a different deal with the banks and bondholders and in the process gain a controlling stake for himself.

But it appears that for the time being INM will be run for one purpose and one purpose only – to pay down its debts.

Another of the conditions imposed by the banks in return for renegotiating their loans is a moratorium on dividends until it has reduced the ratio of its debts to earnings before interest, tax, depreciation and amortisation (EBITDA) from the current high level of about six times EBITDA to three times or less.

This is not seen happening anytime soon, with house broker Davy forecasting that debts will still be 4.4 times EBITDA in 2011. And even then it can only pay out a maximum of 25 per cent of the amount available for distribution.

The banks have also put restrictions on share buybacks, and capital expenditure. Acquisitions will only be allowed if they are equity funded.

Financial discipline will be the watchword at INM from here on out and the decision to promote Vincent Crowley to the position of Chief Operating Officer is no coincidence.

The job announcement focused very heavily on his track record as a cost cutter.

In O’Brien’s view the company is now little short of a zombie and if the banks show no leniency when it comes to implementing the terms of the facilities agreement it is hard to argue with his analysis.

It’s not a position that any business wants to find itself in, but it is particularly dangerous for a company in an industry facing a challenge on the scale of that posed by the internet to traditional media.

The only way the company will be able to wriggle out from under the thumb of its bankers is if it can accelerate debt repayments.

And this can only be realistically achieved through significant asset disposals. The suspicion is that this will become an imperative once the conditions improve sufficiently to allow the company to get decent prices for the assets.

The extent to which the group will have to be dismembered in order to allow it escape its banks’ clutches is an interesting question. Indeed some asset sales may already be factored into the new agreement.

But it seems pretty clear that some very hard and far-reaching decisions are going to have to be made about which bits of the company are core and which bits are not and should be sold.

The presumption is that the Irish business is the core and indeed it is the largest bit, (when allowance is made for the fact that INM only owns about 32 per cent of the much larger APN in Australia).

The second largest division on this basis is South Africa after which comes the UK (including Northern Ireland).

The alternative is not really an alternative. O’Brien might be over-egging the pudding when he calls INM a zombie but it is very hard to see it remaining intact, paying back its loans and meeting the challenges currently confronting its industry.