BREAKFAST DEALS: Murdoch's box seat

News Ltd looks close to picking up James Packer's ConsMedia stake as rival Telstra walks away.

News that Telstra is running the numbers on Nine Entertainment makes a lot more sense now that we find the telco has walked away from James Packer and his stake in Consolidated Media Holdings. It appears the ACCC’s strong concerns for Telstra getting a bigger slice of Foxtel have had an effect. Speaking of Packer, the writedown at Echo Entertainment could not have been better timed for his Kerry Stokes-style play for control. Elsewhere, one analyst thinks Newcrest Mining might have to raise capital if the gold price falls a little further, while both Qantas and David Jones are pouring cold water on M&A speculation surrounding their challenged companies.

News Limited, Consolidated Media Holdings, Telstra Corporation, Nine Entertainment

Rupert Murdoch’s News Limited is reportedly in the box seat to pick up billionaire James Packer’s $900 million stake in Consolidated Media Holdings because cashed-up rival Telstra Corporation, which wanted this deal badly, has walked away. According to The Australian Financial Review, sources indicate the telco has pulled out because of well-founded concerns the competition regulator would not approve such a deal. That leaves News Limited to fight it out with Kerry Stokes’ Seven West Group, which owns a 22 per cent stake in ConsMedia. Australian Competition and Consumer Commission chief Rod Sims made it painfully clear in April that Telstra’s desire to increase its stake in Foxtel would be closely watched by the consumer watchdog. Sims must have made quite an impression on Telstra and its advisers.

Firstly, this gives some important context to yesterday’s news that Telstra’s M&A team is having a look at debt-laden TV network Nine Entertainment. From the outset it looked like a very unlikely scenario unless the Foxtel avenue closed quickly. According to The Australian this morning, Telstra met with Nine’s private equity owner CVC Asia Pacific, which is facing a debt deadline in February. The thought is that if Telstra can pick it up for a price high enough to satisfy CVC but low enough to be considered a bargain, it would secure much-needed content.

Secondly, Telstra might be annoyed that Foxtel is beyond its reach, but the telco can hardly stay mad at the ACCC. Because of what many described as the consumer regulator’s light touch with Telstra’s NBN-deal, the telco has billions to spend. To say that they can’t spend it on Foxtel isn’t a bad deal.

Echo Entertainment, Crown, James Packer

Echo Entertainment chairman John Story has begun his defence against attempts by billionaire James Packer to have him replaced with former Victorian Premier Jeff Kennett. It’s been a rough start.

While the Echo board rallied behind Story, arguing that having a rival install a director was not good for business, Echo also had to announce that third-quarter results have been hurt by the fallout from the dismissal of former managing director Sid Vaikunta, along with a $29.9 million writedown due to the liquidation of VIP junket operator SilkStar. The company added that conditions improved last month, but the news plays right into Packer’s hands. The billionaire has accused Story of poor judgment surrounding the sacking of Vaikunta which is, admittedly, still impacting the company – and for a writedown to fall now makes for honest and up-front good corporate governance, but disastrous timing.

Story is jumping on recent warnings to Echo shareholders that curtailing to Packer’s wishes could result in a Kerry Stokes-style takeover that West Australian Newspapers suffered, to their detriment. That’s all well and good, but if Packer can throw enough mud shareholders might think to vote Story out, but not vote Kennett in.

Newcrest Mining

Newcrest Mining might either have to think twice about its investment program or raise capital if the gold price continues to cool. That’s that conclusion of Macquarie analyst Mitch Ryan, at least. According to The Australian, Ryan says that a gold price beneath $US1,500 an ounce (it’s at $US1560 at the moment) would be challenging for Newcrest because its balance sheet is already stretched.

This puts Newcrest’s $9.2 billion cash-and-scrip acquisition of Lihir Gold in 2010 into an even more unfortunate context. At the end of April this year, Newcrest shares had lost of a third of their value since the Lihir deal was sealed, while the gold price had added the same amount. If Newcrest has to raise capital and dilute smaller shareholders, many will be wondering precisely what the point of the Lihir agreement was. Although, hindsight is 20-20.

Qantas Airways, David Jones, Pacific Brands

Two of Australia’s leading chief executives have moved to hose down M&A speculation surrounding their companies. Qantas Airways boss Alan Joyce is one and David Jones chief Paul Zahra is the other.

Starting with Joyce, the aviation boss has comprehensively dismissed speculation that the company’s decision to split the management of its domestic and international businesses could open the door for Middle Eastern airline Emirates to invest in the domestic arm. Joyce would not reveal anything behind comments from Emirates chief executive Tim Clark that the two airlines could do a code-sharing deal, but on the investment speculation the Irish-born executive was emphatic, "What I am seeing in the press is completely wrong.”

Meanwhile, David Jones chief executive Paul Zahra has similarly cast doubt on the idea of a private equity company swooping on the embattled retailer. Rumours have swirled around the department store due to the recent interest in some struggling Australian retailers, but Zahra said "we’ve not had any credible offers to date,” according to the Herald Sun.

We’d like to point out that Zahra has thrown a qualifier in there, but that’s where we’ll leave it. Although while we’re on the retailers, it was the Kohlberg Kravis Roberts talks with Pacific Brands that inspired much of the speculation about DJs. Of course those discussions have ended, as has the chairmanship of James MacKenzie. The outgoing chair, who will be replaced by fellow director Peter Bush, has rejected suggestions that he’s stepping down because the KKR talks didn’t turn out.

Atlas Iron, Fortescue Metals Group

Australia’s fastest growing iron ore producer, Atlas Iron, is playing a game of 'close, but not to close' with Pilbara neighbour Fortescue Metals Group. According to Fairfax newspapers, Atlas executive chairman David Flanagan said his company is open to discussions with Andrew Forrest’s company about constructing a new rail line in the Pilbara to meet Asian demand. At the moment, Atlas is conducting a feasibility study with QR National that would allow smaller iron ore producers, for the first time, to have their own rail line.

Atlas is currently battling a poor share price that even Flanagan conceded has the board and management thinking about an opportunistic play from one of its larger neighbours. One of those neighbours is BHP Billiton. The other is Fortescue. How about we build a rail line together instead?

Wrapping up

While we’ve touched on the potential movements of Nine Entertainment and Seven West Group on separate deals, the two are actually talking to each other. According to The Age, the two networks are talking to each other about a broadcast sharing arrangement whereby Nine, which has the rights to NRL, would broadcast one AFL game a week in southern states, while Seven, which has the AFL rights, would broadcast an NRL match in NSW and Queensland.

Such a deal would have major ramifications for the upcoming NRL TV rights deal, which is expected to top $1 billion. And in any case, this columnist longs for the days when Nine had the AFL rights.

Meanwhile, over at Spotless Group, new owner Pacific Equity Partners has stamped its authority on the cleaning services company by appointing former Healthscope managing director Bruce Dixon as chief executive. That is, if the scheme of arrangement gets up, which everyone assumes will be the case. Former financial officer Joe Czyzewski will get the same position at Spotless.

And last, but not least, today is the deadline for final bids for Dick Smith. And retailing giant Woolworths will be hoping that a few borderline acceptable bids make their way to its letterbox. It’s expected, however, that Woolworths will have to hold onto Dick Smith until market conditions improve.

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