Ann: Seven Network and WesTrac - Scheme Implement, page-4

re: Ann: Seven Network and WesTrac - Scheme I... Still working my way through all the announcements, but I must say I'm quite stunned by the fall in SEVPC today. Let's look at the facts...

1. Assuming the merger goes ahead, no cash will be changing hands. This is a scrip-for-scrip deal in which SEV will issue its own shares to WesTrac, and WesTrac will become a subsidiary of the listed company (which will become SGH). SEV is NOT giving WesTrac even a cent of its $1,041,856,000 in cash (as at 26.12.09). In other words, the combined entity will retain over $1 billion in cash (plus whatever cash WesTrac brings with it). The only difference is that the company will now be able to invest some of that cash in growing the business, rather than having it sit in a bank account.

2. The company that will be responsible for paying dividends on SEVPC will now be SGH, rather than SEV. SGH will be a considerably larger enterprise than SEV with higher profits. WesTrac is expected to make a profit of $197m in FY2010/11. Add this to whatever SEV makes, and SGH should have a net profit in the $250-300 million range. But while the number of outstanding SGH shares will be higher than the number of SEV shares currently outstanding, let's remember that there will be NO CHANGE in the number of outstanding TELYS. This means that the larger SGH profit will be used to pay divs on the same number of TELYS. To me, this makes the TELYS4 a safer investment than TELYS3...so why the massive fall in SEVPC?

Do you think the big fall today reflects a belief that holding SEVPC is now a riskier position? Or is it simply because it's virtually confirmed now that SEVPC won't be redeemed in May for $100? SEVPC is now sitting on a post-step-up gross yield of close to 10%pa.

I'd be very keen to hear your comments on the above. In the mean time I'll continue reading through the announcements and give you some more of my thoughts later on.

GO SEVPC.