Fairfax's profit downgrade underscores the media sector's challenges, where private equity hunters are circling, while Alesco rejects Dulux's offer.

If you want evidence that the traditional media players are really hurting, take a look at the scenarios before Fairfax Media, Ten Network and Nine Entertainment. Meanwhile, Alesco’s anticipated blunt rejection of Dulux’s approach has split onlookers about whether a higher offer is next, or an exit. Elsewhere, the NSW government has subtly implied more asset sales could be forthcoming, James Packer has rushed to meet the newest member of the Echo Entertainment register and a rival proposal for Eureka Energy has been withdrawn as quickly as it was offered.

Fairfax Media, Ten Network, Nine Entertainment

Investors need only look at the current state of three of Australia’s leading media companies to deduce how challenging the industry’s conditions are – those three are Fairfax Media, Ten Network and Nine Entertainment.

The first is the subject of private equity speculation and is thought to require capital. The second has already raised capital, is similarly a target and has just lost a key executive. The owners of the third are being pursued by US hedge funds, among others, and are staring at a debt-for-equity swap in eight months.

All three are also either selling assets, thinking about it, or being encouraged to consider it.

Starting with Fairfax, chief executive Greg Hywood has just tweaked the publisher’s February revenue guidance down from 7.5 per cent below last year’s result to 8 per cent below. EBITDA is now expected to come in around $500 million, 18 per cent short of the same time last year.

Reassuringly though, Hywood has added that Fairfax will repay its $557 million eurobond on June 15 with existing reserves and will remain within its banking covenant limits afterwards – setting aside capital raising speculation for the moment.

As Business Spectator’s Stephen Bartholomeusz points out, the guidance downgrade is "modest” and "isn’t anything particularly shocking” when you consider that Seven West Media and Ten Network have done the same thing recently. But it does provide yet more ammunition for emboldened mining billionaire Gina Rinehart – who owns 13 per cent of Fairfax – to fire at the board.

It’s an opportunity Rinehart appears to have taken. Speaking to The Australian Financial Review, Hancock Prospecting chief development officer John Klepec audaciously questions whether the board has enough "skin in the game,” referring to their stakes in the company.

Unsurprisingly, chairman Roger Corbett takes centre stage in this criticism. In Klepec’s eyes, and by extension Rinehart’s, Corbett and his fellow directors mightn’t be "true believers” as they haven’t personally bought shares recently.

It’s a timely reminder of the billionaire’s push for two boards seats as takeover speculation swirls, but the execution is…inelegant.

Rinehart’s skin in the game at Ten Network has done nothing to halt the company’s plunge.

Another possible private equity target, Ten shares dived 18 per cent in the wake of a $200 million renounceable rights issues, at 51 cents a share. That’s a 16 per cent discount on the last traded price before the raising and a whopping 38 per cent discount to the price Rinehart bought in at.

Ten also suffered another management setback with the sudden loss of sales chief Mike Morrison.

Morrison just joined the network in January, one of the first crucial hires by new chief executive James Warburton, who was delayed in his crossover from Seven West Media by that same previous employer.

With new, respected talent in the chief’s position, takeover aspirants must be licking their chops at Ten’s receding share price. Perhaps the only thing really protecting it is the major stakes of Rinehart, James Packer, Lachlan Murdoch and Bruce Gordon, who all participated in the capital raising.

Some better news has emerged from debt-laden rival network Nine Entertainment, but it’s a small buffet to a big problem.

According to The Australian, media buyers are giving Nine’s programming strategy for after the Olympics the thumbs up.

But, as has been the case, Nine can’t get clear air to sell its apparently improving fortunes without a reminder that it’s firmly on the chopping block at private equity owner CVC Asia Pacific.

Ten Network director, significant shareholder and WIN Television founder Bruce Gordon is in the AFR this morning declaring his interest in Nine Network. The newspaper understands that he’s seeking discussions with CVC.

"Get in line,” might be CVC’s response. Already they’re got Fairfax, Telstra and Hollywood tycoon Harry Sloan, among others, reportedly sniffing around Nine.

Alesco Corporation, DuluxGroup

The board of garage door maker Alesco Corporation flatly rejected DuluxGroup’s $188 million, $2 a share proposal as inadequate, armed with an independent director’s report.

The expert’s at Lonergan Edwards value Alesco at $2.23 to $2.52 a share. While this kills the possibility of a transaction taking place at $2 a share, the market is still split on whether this will force Dulux to increase its offer or walk away from it.

And, logically, a related question is being asked about whether the significant shareholders that sold part of their stake to Dulux at $2 a share – Northcape Capital, BT Financial and IOOF’s Perennial – to give the paints company its 19.96 per cent stake in Alesco moved too early.

While Dulux might object to the assumptions of the valuation, the Alesco board has made an agreement at, or even close to, $2 a share pretty untenable.

Dulux bought almost 20 per cent of Alesco in an attempt to bully it into submission. Walking away from the deal would leave Dulux boss Patrick Houlihan with $37.6 million tied up as a minority stake in a target he can’t afford.

If Houlihan tries to buy his way out of trouble, an offer at the midpoint of the independent expert’s valuation would be $2.38 a share, which is almost a 20 per cent premium on the price the shareholders sold at.

To complicate Houlihan’s situation, Alesco chairman Mark Luby said yesterday that other companies had shown some interest in the garage door company, but left that salacious comment there without elaborating.

While Luby might be sewing some seeds of speculation, Houlihan equally appears to be laying some tentative groundwork for an end to Dulux’s advances.

Towards the bottom of Dulux’s statement of reply to Alesco, Houlihan said the $188 million deal was "not a must do” for his company – evidently, as they make garage doors and you mix paints.

"A number of the conditions of our offer have already been breached, or may be breached, by Alesco and we are considering our position accordingly,” Houlihan said.

That doesn’t sound like a CEO preparing the market for a higher offer.

For what it’s worth, the Alesco share price is holding a slight premium to the Dulux offer, with the stock closing at $2.03.

That either indicates a certain confidence that Dulux, with 19.96 per cent in the game, won’t (or can’t) walk away from its offer. Or, that the unusual approach from a paints company has forced investors to reassess their valuation for Alesco.

NSW government privatisation

NSW Treasurer Mike Baird didn’t announce any new privatisations during yesterday’s budget, but it was suggested that more assets could be put on the block.

Port Kembla and the NSW lotteries royalties could be added to the existing list of Port Botany, NSW electricity assets and the Cobbra coal mine.

The NSW government has tapped adviser Morgan Stanley to investigate the possibility of selling Port Botany and Port Kembla together. It comes as bidders for Port Botany are starting to form consortiums, The Australian Financial Review reports.

It also comes amid a potential push by the NSW government to increase spending from State Super, a government defined-benefit scheme, to bid for state infrastructure assets.

This adds a powerful force to the already strong interest in government-regulated infrastructure assets and enhances the government’s ability to pay for new infrastructure with the proceeds of the sale of old ones.

Echo Entertainment, Crown, Genting, James Packer, KT Lim

Gaming billionaire James Packer has reportedly wasted no time meeting with Singapore casino tycoon KT Lim to establish whether he’s a friend or foe in Crown’s pursuit of rival Echo Entertainment.

The Australian Financial Review reports that Packer and Lim met in Macau last night after Lim’s Genting bought 4.9 per cent of Echo, which is poised to announce a capital raising.

With the capital raising, reported to be worth at least $400 million, new boss John O'Neill is showing onlookers that he won’t be a passive defender of Echo. Expect details on the raising to drop this morning.

Wrapping up

While we’re talking capital raisings, BlueScope Steel shares jumped 9.6 per cent in yesterday’s session as the company indicated it has no new plans to put the hat out to investors.

Shareholders will be glad to hear it. The company’s highly dilutive $600 million raising in mid-November put the share price into a prolonged period of range trading around the offer price of 40 cents. It was suggested that underwriter Credit Suisse was slowly offloading the $135 million shortfall from the capital raising and, as such, the share price had nowhere to go until that was completed.

The shares have since emerged from that trance to slip to yesterday’s close of 28.5 cents. It appears that BlueScope doesn’t have much room to move with its share price anyway.

Meanwhile, rival OneSteel has successfully refinanced its $295 million syndicated lone that was supposed to expire in August 2013.

OneSteel said it was "substantially oversubscribed” and was scaled back from $331 million. The new facility will have a four-year term.

Elsewhere, Aurora Oil & Gas looks more like winning US-focused shale gas explorer Eureka Energy after a rival merger proposal with unlisted US company Lonestar was withdrawn.

Aurora’s $107 million cash offer has already gifted the company an 18.5 per cent stake in its target, greatly increasing the chance that its offer will get up.

In aviation, Qantas Airways chief executive Alan Joyce says he might have Macquarie Group and Citibank monitoring the register, but the company hasn’t received any takeover offers just yet.

Things are happening over at rival Virgin Australia as well. Etihad chief executive James Hogan has suggested that the airline might increase its stake above the 10 per cent mark he’d flagged earlier, though a full takeover is not on the cards. Hogan will first have to get approval from the Australian Foreign Investment Review Board to go past 5 per cent.

Air New Zealand also indicated that it is unmoved by Etihad’s presence and won’t be increasing its 20 per cent stake in Virgin.


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