APN's majors achieve their wishes with a coup

The board and management coup at the publishing group APN News & Media was as brutal as it gets in the world of big businesses.

The dumping of the company's chief executive, Brett Chenoweth, and four other directors including the chairman of only six months, Peter Hunt, is the kind of action taken when a company is struggling badly. Earnings are in decline and its prospects for recovery are clouded at best.

As of 9am Tuesday this team of APN governors will no longer be employed, having been forced to walk the plank by the company's two major shareholders - a struggling Irish media company, Independent News & Media PLC, and an institutional investor, Allan Gray, together accounting for just over 50 per cent of the stock.

The strategies of the two camps diverged and the party with voting control of the stock got to call the shots. Make no mistake: APN's earnings are under intense pressure and neither of the protagonists in this saga would disagree.

The issue on which there is a split is whether the company's balance sheet is in such a perilous state that it needs to be repaired by raising more capital from the shareholders.

The majority of the board and management had a plan to raise about $100 million and sell assets to reduce the company's $470 million in net debt. The strategy involved the issue of stock at the discounted price of 20¢ a share.

The talk in the ether suggested APN had a near-immediate need to raise cash or risk being in breach of loan covenants - which are agreements the company has with its lenders around a number of metrics. In this case the concern was about the ratio of debt to earnings before interest tax and depreciation.

The majority of the now-sacked board - those who were not associated with the major shareholders - suggest this ratio of three times was too high.

It certainly is among the highest of its peers, but analysts are not suggesting it was at risk of breaching bank covenants imminently.

How much leeway APN had was as much a factor of its near- to medium-term earnings prospects as anything else. Those in favour of an equity raising thought APN needed a capital buffer to ward against the uncertain times ahead.

Thus the independent majority of the board had taken the view that it needed to raise money.

The two major shareholders disagreed.

There is little doubt that the largest shareholder, Independent News & Media PLC, had its own financial issues - it is struggling under its own pile of debt and a penny dreadful share price. Its market capitalisation is sitting at a precarious $20 million.

Thus its reluctance to stump up fresh capital to prop up its Australian associate is no surprise.

The other major shareholder, Allan Gray, has taken a big punt on challenged Australian media company shares over the past couple of years - including Fairfax, publisher of the Herald - and is sitting on substantial losses on these punts.

It is estimated that Allan Gray's average buying price for APN is about $1.30 a share against the current share price of 30¢.

The back story from the now-former APN directors is that the major shareholders did not have the readies to invest any more in the company and thus could not support a capital raising.

None of this emerged as an issue until late last week when Independent Media issued a statement saying it no longer supported Chenoweth as the APN chief executive.

The response from the board and the non-aligned directors was to support the chief executive.

Until last week the entire board are said to have supported the idea of a capital raising - which was due to be announced this Thursday along with the APN results.

The major shareholders tell the story a different way. They say the chief executive and chairman who have lost their positions were financial engineers with no understanding of media and should be replaced with experienced industry operatives.

The major shareholders contend that the decision to proceed with a capital raising despite their objections was a suicide mission.

Regardless of who one believes, the fact remains that APN is under intense earnings pressure thanks to its reliance on the traditional print media assets.

It has a couple of more resilient media assets - investments in outdoor advertising and radio - but these could not offset the declining revenue contributions from print in Australia and New Zealand.

The migration to digital had also been an issue - APN was late to the game in this area of business.

These are issues for the yet-to-be-announced new members of the board and management. It is most likely one of the few remaining board members, Peter Cosgrove, will be named as replacement chairman - and he may need to deliver the company's first-half earnings.