Murdoch Son Seen Vying to Reclaim Ten Network: Real M&A
By Angus Whitley & David Fickling - Dec 14, 2012 10:06 AM
For buyers as diverse as Rupert Murdoch’s eldest son and rural broadcaster Southern Cross Media Group Ltd., there’s no cheaper media target in Australia than Ten Network Holdings Ltd. (TEN)
The country’s third-ranked television broadcaster, which airs “Homeland” and focuses on younger viewers, has plunged 60 percent this year after twice selling new stock to pay back debt and turning off advertisers with programming flops. Even after revenue in the year through August fell to a decade-low, Ten trades at a 53 percent discount to its sales, the least expensive multiple of any similar-sized media company in Australia, according to data compiled by Bloomberg.
Ten offers acquirers a free-to-air commercial broadcast license that’s one of only three for Australia’s cities and valuable regardless of current ratings, said Cox Media. Now with more cash than debt, the A$673 million ($710 million) network could return to profit with better programming, according to Colonial First State Global Asset Management. Ten may be a target for Chairman Lachlan Murdoch, whose father Rupert Murdoch once owned the network, said BBY Ltd., while Credit Suisse Group AG said Southern Cross (SXL) would also be a logical bidder.
“There are no more licenses to be issued -- from a strategic perspective, that’s how any buyer would think,” Raaz Bhuyan, a Sydney-based fund manager at Colonial, which manages about A$152 billion, including Ten shares, said in a telephone interview. “Ten’s fundamental problem is it hasn’t attracted the audience. They just need to attract the eyeballs so they can go to the advertisers and ask for the dollars.”
Rupert Murdoch
Neil Shoebridge, a spokesman for Sydney-based Ten, declined to comment on a potential takeover. John Connolly, a spokesman for Lachlan Murdoch’s Illyria Pty. at John Connolly & Partners, said by e-mail he wouldn’t comment on market speculation. Rhys Holleran, chief executive officer of Melbourne-based Southern Cross, didn’t respond to a phone message and e-mail seeking comment.
Ten, which broadcast the 1970s drama “Prisoner,” grew out of a network of city channels licensed by Australia’s government. The station has a history of wealthy owners.
Rupert Murdoch, the 81-year-old chairman and CEO of New York-based News Corp. (NWSA), sold control of the network in 1987 after becoming a U.S. citizen. His son Lachlan, 41, who lives in Sydney, and casino billionaire James Packer acquired stakes in 2010. They each own 9 percent, while Gina Rinehart, Asia’s richest woman with a fortune of $18.7 billion, has a 10 percent stake, according to Ten’s annual report and data compiled by Bloomberg.
‘Homeland’ Viewers
The backers haven’t protected Ten from a ratings slump. “Everybody Dance Now,” a talent show hosted by Lachlan Murdoch’s wife Sarah, debuted in August and was canceled within weeks. “Masterchef Australia” is the only Ten program among Australia’s top 50 shows on free-to-air channels this year, according to data from FreeTV Australia, which represents commercial free-to-air television licensees.
The TV drama “Homeland,” which has won two Golden Globes and six Emmys, didn’t make the rankings. That reflects the channel’s broader struggle to attract viewers, even with award- winning content, said Tim Montague-Jones, an analyst at Morningstar Inc. (MORN) in Sydney.
Ten’s share of advertising revenue in Australia’s five largest state capitals dropped to 26 percent in the first six months of this year, from 29 percent a year before, according to FreeTV Australia.
‘Downton Abbey’
Seven, which broadcasts “Downton Abbey” and is owned by Seven West Media Ltd. (SWM), had 40 percent of the advertising, while Nine Entertainment Co. had 34 percent in the most recent period.
Programming failures won’t turn off acquirers because Ten’s appeal lies in its broadcasting license, an asset whose value doesn’t just depend on popular programs, Peter Cox, a consultant at Sydney-based Cox Media, said by phone.
“There are only three free-to-air commercial TV stations in Australia,” he said. “There’s got to be considerable value in having the third station.”
The licenses allow Ten, Nine and Seven to air programs in major cities, while the networks must rely on regional partners to broadcast beyond metropolitan areas because of current regulations.
Australia is proposing to change that, allowing mergers between the metropolitan and regional broadcasters. The law will be introduced to parliament early next year, Adam Sims, a spokesman for communications minister Stephen Conroy, said in a phone interview from Canberra, Australia.
Southern Cross
The change would make Ten and Southern Cross merger candidates because they already have a programming alliance, Digby Gilmour, an analyst at CLSA Asia-Pacific Markets in Sydney, wrote in a Dec. 12 report. Southern Cross buys programs from Ten and broadcasts them in the regional markets.
Ten’s sales fell to A$727 million in the year through August, the lowest since 2002, and the company swung to a loss of A$12.9 million from a profit of A$14.2 million a year earlier, regulatory filings show. Rights offerings to raise a combined A$430 million, to fund new programming and repay debt, have also weighed on its shares.
In the most recent sale, Ten offer stock for 20 cents a share, 38 percent less than its previous closing price at the time of the Dec. 6 announcement. The discount has served to make Ten a cheaper and more attractive takeover target, Mark McDonnell, a Sydney-based media analyst at BBY, said by phone.
Rinehart’s Motives
“Normally you would only have a major rights issue with the share price at this very low level in dire circumstances because it is so dilutive,” said McDonnell. “Circumstances cannot really be described as dire.”
A 60 percent drop in its stock price has left Ten with a price-sales ratio of 0.47, data compiled by Bloomberg show. That’s the lowest among 10 Australian media companies with market values of more than $250 million, a group that fetches a median valuation of 1.22 times sales.
McDonnell said both Rinehart and Lachlan Murdoch have reason to make a bid for Ten. Rinehart, whose wealth comes from iron-ore mining, may be seeking a platform for her political views, he said.
“Her forays into media seem to be associated with a wider political agenda associated with her mining interests,” said McDonnell. “That’s really almost like an expense to support a far more serious wealth creation strategy.”
In June, Rinehart failed to gain a board seat at newspaper publisher Fairfax Media Ltd. (FXJ) after disagreeing on conditions including signing a charter of editorial independence.
Family Business
Mark Bickerton, a spokesman for Rinehart, declined to comment on her interest in Ten.
Lachlan Murdoch, by comparison, is more closely entwined in Ten, said McDonnell. Ten buys some of its programs, including “Masterchef Australia,” from Shine Group, the London-based production company founded by his sister, Elisabeth Murdoch, and now owned by News Corp. Lachlan Murdoch is a board member of News Corp. and was deputy chief operating officer of the company until 2005.
For Southern Cross, a merger would provide more control over costs and content and allow it to diversify its business, according to Samantha Carleton, an analyst at Credit Suisse.
“They’ve got a radio business which should be less cyclical and could support a greater investment upfront,” she said in a phone interview from Sydney. “Over time, as the TV improves, that could have benefits.”
Turnaround Plan
Southern Cross, Australia’s largest commercial radio network, owns the station that broadcast the prank phone call to the London hospital where the Duchess of Cambridge was treated this month.
There’s no sign Ten’s revenue will recover in the next five years, said Morningstar’s Montague-Jones. Advertisers can spend on digital channels serving niche markets, and programming will still suck up capital, he said.
“There are a number of different scenarios you could come up with where it’s privatized,” he said. One of Ten’s billionaire shareholders “could orchestrate a privatization of the business and take it off the market.”
Montague-Jones values the stock at just 11 cents, according to his Dec. 10 report, less than half yesterday’s closing price of 26 cents a share.
Still, Ten has begun cutting costs, which will help it spring back to profitability quickly if it can draw advertisers back, said Bhuyan, the fund manager at Colonial.
‘Viable Business’
The company plans to cut costs by 6 percent this year, and once it repays A$210 million of borrowings due in March, will have net cash of A$45 million, it says. That compares with net debt of A$416 million at the end of August 2011.
Each percentage-point increase in industry revenue share adds A$25 million to Ten’s earnings before interest, taxes, depreciation and amortization, Credit Suisse said. Last year’s total Ebitda was A$94 million.
While Ten’s share of advertising revenue may slump to 22 percent next year, it may rebound to 27 percent in 2018, according to forecasts from Commonwealth Bank of Australia. (CBA)
“There’s definitely a viable business there,” said Cox of Cox Media. “Who wouldn’t like to have A$600 million to A$800 million of revenue a year?”
