Ten Network’s confirmation that it has received proposals from "a number of parties" that could lead to a change of control or a refinancing of its debt confirms that others see upside in the beleaguered network where the market doesn’t.
They might not be prepared to pay much for that upside: market speculation has centred on an offer of 20c to 25c a share from US cable network Discovery Communications and Foxtel. However, the interest in Ten does tend to contrast with the pessimism with which the market has increasingly viewed the network as its fortunes have inexorably declined.
While Ten cautioned that the proposals were non-binding and conditional and urged caution in dealing in its shares on the basis of the speculation about potential transactions, it does have intriguing turnaround and strategic potential for prospective buyers.
That latent upside explains why Ten’s biggest shareholder, Bruce Gordon, is unwilling to contemplate selling his 14.9 per cent shareholding into any offer, forcing prospective bidders to contemplate structuring offers that would give existing strategic shareholders in Ten, which include Lachlan Murdoch, James Packer and Gina Rinehart, the option of maintaining an exposure.
There are obvious political and competition policy sensitivities from any bid that includes Foxtel, albeit with a prospective stake of less than the 15 per cent threshold that would breach current media laws. However, through a purely business lens, the attraction of Ten to Discovery and Foxtel in particular is obvious.
In an environment where, globally, subscription television businesses and free-to-air networks are being disrupted by new internet-streaming services like Netflix, access to new distribution channels and different (non-paying) audiences through which to leverage their existing content is appealing. Viacom and Liberty Global have both acquired free-to-air broadcasters this year.
Foxtel, jointly owned by Telstra and News Corp (publisher of Business Spectator), would see significant cost synergies at both a programming and operational level, a far more powerful combined offering to a wider array of potential advertisers, cross-promotional opportunities and a strategically stronger position from which to negotiate the rights to broadcast major sporting events.
Ten, until recently, had been in what appeared to be a death spiral, responding to plummeting ratings by continuously cutting costs, which impacted its programming, ratings and revenue. With no earnings and a stretched balance sheet -- its key shareholders had to guarantee a $200 million loan last year -- it has been on the brink of something unpalatable for some years.
This year, however, there has been a chink of light at the end of a very gloomy tunnel. Hamish McLennan has, for the first time in a long time, lifted Ten’s ratings. It is now generating ratings shares around the 22-23 per cent level. Unhappily, its revenue share lags its audience share, at less than 19 per cent.
In a three-party market, McLennan’s aspiration of a revenue share of 25 per cent "over time" isn’t absurdly ambitious. If it could be achieved it would be worth a couple of hundred million dollars a year of additional revenue and earnings for the network.
If Ten can be privatised, whether by Discovery and Foxtel or one of the other interested parties, which include several private equity players, it would be out of the market’s spotlight and the pressure for near-term performance that a stock exchange listing imposes.
It could be recapitalised, funded to invest in more compelling programming (or being given access to it by the new owners), and given a longer term timeline in which to improve its ratings and financial performance. Any synergies the new owner/s could generate beyond that would be a bonus. Time, patience, and dollars are the two critical ingredients if Ten is to be successful turned around.
How the bringing closer together of Foxtel and Ten might play out in a post-national broadband environment is an open question. However, the combination of Telstra’s customer base, digital content and wireless networks, Foxtel’s cable and satellite distribution platforms and the vast array of content it sources (and which Discovery generates) would create a lot of optionality and flexibility to respond to the changing broadcast media landscape.