Good article about TEN and how the heavy weights play when they want something...also a good reminder to be wary of companies where the Directors have a significant holding of shares and/or start being gratuitous with funding the business for "the next stage". There are quite a few other examples floating around the bourse...
[START]
Ten troubles a warning to investors
Now to Lachlan and James. When you make investments with your friends, think of the lessons from the Ten Network. Lachlan Murdoch and James Packer were mates and clearly they reckoned that they could make Ten Network do well. Maybe they dreamed up their plan over a barbecue, which is the way a lot if these schemes are devised?
So, at first, they invested heavily in the equity of the Ten Network (Gina Reinhart thought that if the Packers and Murdochs thought it was good, she should have a slice). But it soon became apparent that Ten was harder than they thought. Then James and Lachlan guaranteed a $200 million Commonwealth Bank line of credit for the Ten Network. It is a big step from being a shareholder in the public company to then guaranteeing some of that public company’s debt.
The fundamental problem with Network Ten is that there has been a significant change in the television audience. The Ten Network was extremely skilled in promoting the “young people market”, which was an area that other channels did not focus on. Unfortunately, the development of social media and other electronic outlets has sucked young people away from television (and also newspapers), so a very different strategy is now required.
Whenever you make an investment, always keep an eye on what is taking place in the industry. In today’s environment, we are going to see many fundamental industry changes. Media problems, including television, are merely a forerunner of events to follow. I think it is reasonable to assume that the retail sector will go through a similar revolution to media. In other words, keep your eye out for fundamental industry changes. The US and European trends will transplant to Australia.
In the case of Network Ten the Murdoch family were particularly exposed, because it seems Lachlan had pledged part of his inheritance. On the other hand, if the TV laws ever changed Network Ten would be a very valuable acquisition to the News Corporation/Foxtel empire.
Just before going into administration Network Ten was going through a substantial reorganisation of its cost base, but it was dependent on the continuation of the loan guarantees to get it through this restructuring period.
When notice was given that the guarantees were to be withdrawn in December, Lachlan Murdoch wrote to the directors to say they could be personally liable. The administrator had to come in. Assuming the media changes go through Parliament, the Ten Network could end up being owned by Lachlan Murdoch, News Corp and/or another big stakeholder, Bruce Gordon.
Small shareholders have lost out. Exactly how all these things took place I have no doubt will be the subject of many articles. But those investing in high-risk companies like Network Ten face an extra risk when there are entrepreneurial shareholders who have personally guaranteed loans, a major corporate play involved, at the same time as the industry is changing rapidly. It is usually better to stay away from such situations.
[END]
