APN's no better for a Chenoweth chop

Even amid all the tumult the Australian media landscape has seen over the past months, few could have predicted the casualty that has seen APN News & Media's stock plunge and its chief executive axed along with half the board.

It kicked off in mid December when APN, which has lost 64 per cent of its value over the past 12 months, informed the ASX in a trading update that it, like most media companies, was facing a challenging advertising market. Two months later its majority shareholder, Independent News and Media, shocked the market by publicly voicing its lack of confidence in APN chief executive officer Brett Chenoweth.

Chenoweth, along with the independent non-INM board members, was investigating the possibility of a further capital raising to pay down existing debt, which INM was opposed to. INM had, in its own words, lost confidence in Chenoweth's ability to implement the strategic initiatives necessary to reposition APN for the more challenging media landscape that has emerged in Australasia. APN was placed in a trading halt, and yesterday Chenoweth as well as chairman Peter Hunt and three independent directors all tendered their resignations.

What this leaves is a troubled media company in even more trouble. Its leader is gone. The board is in turmoil and INM – which is not without its own issues – has inserted two of its own directors in to help steer the ship in the interim.

The reality is, INM as a company is facing the same fundamental strategic challenges that APN is, and like APN has thus far struggled to reverse the bleed. Both APN and INM are seeing revenue go backwards. The main driver for both is the decline in the overall advertising climate for their respective newspaper assets, which is primarily being led by a rapid decline in classified revenue and a sluggish display advertising market. For both companies the newspaper assets make up a large chunk of overall group revenue, and as a result this revenue decrease is severely impacting the performance of both APN and INM.

However, unlike INM, APN has a collection of workmanlike radio and outdoor assets, which are strong performers in their respective areas and are helping generate strong contributions to group performance. Like INM, APN has a mixed bunch of digital assets that are currently failing to really deliver much in terms of revenue or future growth. For 2011, INM digital advertising revenues were only 4 per cent of overall advertising revenue. In 2012's interim results, APN's digital businesses accounted for only 2 per cent of total group revenue. Another similarity between the two businesses are their respective debt loads – at the end of 2011, INM had a debt load of €426.8 million; in June 2012 APN had net debt of $477.1 million.

According to chairman James Osborne, INM's focus is on "paying down debt and driving further cost efficiencies across the board”. It wouldn't be unexpected to see INM attempt to push a similar mandate within APN. INM's focus on cost cutting has allowed it to deliver an operating margin above 13 per cent for 2011. APN for 2012 is likely to post an operating margin around 5-6 per cent. INM has also started selling off assets, reaching a deal earlier in the week to sell off its South African newspaper business.

So what could APN do to try and raise funds to pay down debt? The obvious move is to break off parts of the group – namely the sluggish New Zealand print and radio assets, or the stronger performing Australian radio joint venture and the Adshel joint venture. The problem? APN's Australian Radio Network business has been a strong performer for the group – revenue was up 8 per cent for the first half of 2012 with EBITDA up 21 per cent and market share up for the same period. The New Zealand radio business is not in the same good shape – the Adshel out-of-home business is a similar bright spot – with APN's market update in December stating the group felt Adshel would generate a 25 per cent increase in EBITDA for 2012.

Both ARN and Adshel are 50/50 joint ventures with American media company Clear Channel, which would no doubt consider the option of taking the remaining 50 per cent of each from APN. However by spinning these off APN would be selling off the two businesses which have the best future potential within the group. If you sell them off, you run the risk of being left with a declining newspaper business with a significantly lower debt load, but devoid of any future prospects beyond continued cost containment.

To sell off the New Zealand assets, APN needs to find someone who wants to buy them – which is ultimately contingent on a friendly sale price. Based on their performance over the past two years, any acquirer would be purchasing a group of businesses in decline, operating in two categories that are at best experiencing no growth and at worst going backwards. Obviously this lowers both the likely sale price and the pool of potential acquirers.

Perhaps the greatest indication of Chenoweth's potential future strategy was his purchase of the BrandsExclusive business in mid 2012. According to ASX filings, APN took an 82 per cent stake for $36 million upfront with another $30 million contingent on meeting earnings targets. APN reported the purchase was at a 7-8 times forecast 2013 EBITDA, with BrandsExclusive on track to deliver $70 million of revenue in 2012. What this move signified was APN's strong focus on diversifying its revenue streams beyond advertising. BrandsExclusive – which claims 1.8 million members and according to Nielsen generates over 650,000 unique visitors per month – is a transaction based site, generating revenue from selling mid-level fashion brand stock at below retail price.

Chenoweth clearly saw BrandsExclusive as an asset that could benefit relatively quickly from APN's radio, outdoor and print brands and audiences, the idea being to increase usage and frequency through cross promotion across APN channels and clever usage of unsold inventory to promote BrandsExclusive. It would allow APN to generate meaningful EBITDA from a digital asset (something it hasn't been able to accomplish to date) that was not reliant on a turbulent advertising climate.

Strategically, if BrandsExclusive can deliver on its 2013 forecast, it was a smart move – and one potentially indicative of a theoretical desire by Chenoweth to reduce the group's reliance on advertising and seek more fast scaling transactional opportunities. It could be argued this was precisely the right direction to take: invest in businesses that could allow APN to expand its relationship with users beyond advertising into transactions and in doing so remove the group's heavy reliance on advertising revenue.

With Chenoweth and half the board now gone, it remains unclear what APN's future plans are and yet glaringly apparent what challenges remain.