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Is Nine Entertainment broken?

The private equity model of loading companies to the neck with debt and then flipping them back to the public might be a tough sell for Nine Entertainment owner CVC Asia Pacific when it passes the hat around for its next fundraising adventure.

Channel Nine was once the central beacon of Kerry Packer’s empire, but is now on the verge of bankruptcy. The holders of Nine Entertainment’s senior debt, hedge funds Apollo Global and Oaktree Capital (run by the very talented Howard Marks), are manoeuvring for management control of the business.

At a reported $1.8 billion, it’s a significant loss for current owner CVC and one which Fools can learn a timely lesson from, since many other listed media companies carrying significant levels of debt may appear tempting investments.

Newspaper, magazine, and Channel 7 owner Seven West Media (ASX: SWM) is highly leveraged with 71% net debt to equity. Shareholders in Kerry Stokes’ mining services and media holding company Seven Group (ASX: SVN) are exposed to a balance sheet with 67% net debt to equity. APN News and Media (ASX: APN) and Fairfax Media (ASX: FXJ) are also financed with significant levels of debt, with net debt to equity ratios of 61% and 45%, respectively.

Investors will have a clearer idea of Ten Network’s (ASX: TEN) balance sheet next week when it releases its full-year results. Given the June $200 million capital raising and the July sale of the outdoor advertising division, Eye Corp, for $120 million, the balance sheet should be in better shape but any write-downs to intangible assets will offset this.

Foolish takeaway

The media sector is facing many challenges and structural issues. Coupled with high levels of debt, it is a recipe for trouble. This has been reflected in the share prices and performance of the media stocks mentioned above. Stocks are usually cheap for a reason. Nine Entertainments’ predicament should serve as a reminder that it is risky to blindly buy cheap stocks.

If you only invest in one company this year, make it our “Top Stock for 2012-13.” Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool contributor Tim McArthur owns shares in Ten Network. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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