BREAKFAST DEALS: Nine in a bind

Nine bustles to get its lenders to settle their differences, while short-sellers look to be the losers in the latest QR National deal.

The upper echelons of Nine Entertainment are on the phone this morning with feuding lenders trying to secure a deal. The tectonic plates of the Australian media sector are shifting, as speculation emerges for a Kerry Stokes play to buy out the Seven West Media with its share price in the tank. Meanwhile, the Queensland government has caught institutions short on QR National out, while Alan Joyce has received a much-needed fillip from Canberra. Elsewhere, Genting’s Hong Kong is a substantial shareholder in Echo Entertainment, but we still don’t know if it was behind Friday’s action.

Nine Entertainment, CVC Asia Pacific, Apollo Global Management, Oaktree Capital, Goldman Sachs, Seven West Media, Kohlberg Kravis Roberts

Nine Entertainment chairman Peter Bush and chief executive David Gyngell are apparently holding a conference call this morning in an effort to bring its lenders to some kind of consensus before receivership becomes unavoidable.

Media reports say the usual suspects will be on the line: Bush and Gyngell with their lawyers from Gilbert Tobin, and of course main senior US hedge fund lenders Apollo Global Management and Oaktree Capital, and mezzanine debt holder Goldman Sachs.

Management are reportedly poised to put their own restructure plan to the hedge funds and Goldman Sachs, in the hope that such a framework might coax the two sides into agreeing on a valuation for Nine.

Nine’s senior debt is maturing in February and, because Christmas is fast approaching, the window during which various regulatory and court-related matters can be settled for a deal to progress is rapidly closing. Most reports say it’ll be closed within about a month.

After the sale of ACP Magazines, Nine’s senior debt stands at about $2.2 billion, with almost $1 billion in mezzanine debt held by Goldman.

The US hedge funds believe that Nine isn’t worth more than it’s total senior debt. Goldman disagrees, because it’s hoping to convert some of its inferior debt holdings into equity.

The Australian Financial Review hints that Nine’s management will put forward a plan "that would divide Nine up between its lenders through a mixture of debt, equity and warrants”.

It’ll be interesting to see what the result is. Talks that occur over the phone generally don’t go as seamlessly as those that take place in person. But what choice does Nine have?

The news also comes after shares in Seven West Media jumped 4 per cent yesterday to $1.27 amid speculation that billionaire Kerry Stokes could buy it out with the help of a partner.

The theory is that Stokes, who holds 33 per cent of Seven West Media via Seven Group Holdings, could team up with Kohlberg Kravis Roberts to take the rest of the company.

KKR holds around 7 per cent of Seven West Media. If Stokes and KKR put their existing stakes together, that would leave 60 per cent of the register, which at current market value is worth about $760 million. Add in a 20-30 per cent takeover premium (something Stokes isn’t exactly known for) and you’ve an expense in the order of $900 million to $1 billion.

This play makes a certain amount of sense. Seven West Media shares are down 60 per cent this year thanks to the advertising market downturn. Assuming there’s a rebound on the way, it’d make for great timing.

But what’s that saying about assumption being the mother of all…egregious errors.

QR National

QR National chief executive Lance Hockridge has described the structure of the Queensland government’s selldown of $1.5 billion in his company’s stock as "elegant”.

As many readers would be aware, QR National is picking up $1 billion worth of the stock through a buyback, which is subject to a shareholder vote and an independent expert’s report. The remaining $500 million was placed to unnamed "long term, strategic shareholders” by the government’s investment bank UBS.

Media reports point to Abu Dhabi Investment Authority and Canadian Pension Plan Investment Board as the institutional shareholders to pick up stock over the weekend.

The final sale price was $3.47 a share, the same as QR National’s closing price on Friday.

The stunning move still leaves Premier Campbell Newman and his Treasurer Tim Nicholls with 16 per cent of QR and the pair seem intent on collecting some share price appreciation in the near-term. However, a further sale to pay down the state’s debt has not been ruled out.

Given the success of this deal, it’s easy to see why. With the help of UBS and Rothschild, Nicholls has cleared $1.5 billion in stock at a premium to all the standard volume weighted average prices from 3- to 90-days.

While Queensland will put the proceeds towards its debt, QR’s gearing will jump to 25 per cent from 12 per cent thanks to the buyback.

This shouldn’t alarm the shareholder base. That isn’t just low for a company like QR, but the coal hauler also has another $850 million in its debt capacity to lean on after the buyback, according to Macquarie analyst Ian Myles.

So the state benefits and the company benefits. One wonders whether the institutions have bought in a little too high – it’s rare that everyone emerges from a deal as an unqualified winner. We’ll have to wait and see.

As explained in this morning’s edition of The Distillery, the biggest losers from the proposal were the institutional investors short on QR under the assumption that a big block sale would allow them to buy in on the cheap. Hockridge might also describe the structure of the deal as "poetic”.

Qantas Airways, Emirates

Qantas Airways chief executive Alan Joyce is in the nation’s capital today armed with a pretty strong endorsement from the federal government for his 10-year alliance with Middle Eastern carrier Emirates.

The Department of Infrastructure and Transport made a submission to the Australian Competition and Consumer Commission – the biggest obstacle for Qantas and Emirates – saying that it’s purpose is to look at the industry as a whole.

"On this basis, the department considers the proposed agreement will enhance consumer choice, deepen competition in a number of markets and, like recent Virgin Australia partnerships, broaden Qantas’ international network at minimum capital cost,” said the department.

The submission went on to say that it believes the proposal is not only positive but "consistent with the Australian government’s aviation policy settings”.

Qantas recently withdrew an application to the ACCC for interim approval of its alliance with Emirates, saying that it could conduct some preparatory work on the proposal without the consumer watchdog’s blessing.

Virgin Australia had objected to the interim approval in the first place – with Qantas having done the same when Virgin was preparing to align itself with Etihad Airways.

No matter, Etihad is really starting to talk tough about the prospect of a challenge from Qantas and Emirates.

Chief executive James Hogan is boasting a code-sharing arrangement with Qantas’ former partner Air France-KLM. The pair used to collaborate on flights between Australia and Paris.

"We are well positioned for Australia. This block we have in Europe with Air France-KLM and Air Berlin is pretty powerful,” Hogan said, according to media reports.

This perhaps speaks to the Department of Transport’s comments about having to look "beyond competitors’ reactions”. Broadly speaking, airlines have a tendency to sell their own alliance proposals as company transforming deals, while portraying similar deals of their rivals as competition killing creations.

Given the present state of the global aviation market, the truth lies somewhere in between.

Wrapping up

The Hong Kong arm of Malaysia’s Genting has become a substantial shareholder in Echo Entertainment once again, with a notice to the ASX showing that its share has increased to 5.2 per cent from 4.2 per cent.

The notice points to trades that began to two weeks ago, but we’ll have to wait until later this week before we discover whether Genting was behind big trades over the last two sessions.

Meanwhile, The Australian reports that Terry Streeter’s Fox Resources has picked up 17 Queensland coal tenements from US miner Cliffs Natural Resources.

Fox has been in a trading halt since Friday and the newspaper expects the deal to be revealed today.

Elsewhere in resources, The Australian Financial Review reports that mining contractor Sedgman is looking to have three private companies of Nathan Tinkler wound up after the mining tycoon couldn’t service $2 million in debt. This comes on the back of similar legal pushes by Mirvac Group and coal developer Blackwood Corp.

And finally, Mayne Pharma Group says it has received good demand from institutions for the $65 million part of its capital raising, as part of its push to secure a privately held company Metrics Inc.


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