BREAKFAST DEALS: Stoking the fire

Seven's role in the fate of Consolidated Media Holdings looks overstated, while CVC Asia Pacific sends Ticketek bidders back to the end of the queue.

Two things were overlooked in the initial coverage of Kerry Stokes’ decision on Friday to ask the consumer watchdog for its take on Seven Group increasing its stake in Consolidated Media Holdings or putting up a rival bid to News Limited's. Still in media, CVC Asia Pacific’s bid to hold Nine Entertainment has been complicated by its sale of Ticketek. Billabong International shares will open in a dire state this morning as a call emerges for founder Gordon Merchant to go. Also this morning, Perpetual boss Geoff Lloyd will reportedly take his first step to stop the register from thinking about takeovers, with cost cut announcements.

Seven West Media

Seven Group Holdings chairman Kerry Stokes will undoubtedly play a role in the fate of Consolidated Media Holdings (CMH), but media reports talking up a showdown with fellow media mogul Rupert Murdoch are crucially premature.

The Australian Competition and Consumer Commission (ACCC) revealed on Friday that Seven is "actively considering” raising its stake in CMH and has requested that the consumer watchdog "review a proposal for an acquisition of all of the shares [that] it does not already own”.

If the ACCC doesn’t find anything untoward about this, Seven could be on a collision course with Rupert Murdoch and News Limited’s $2 billion bid for CMH, which owns 25 per cent of Foxtel.

Sounds compelling, doesn’t it? And it is. But two things were missed in the initial coverage of this event. Both reflect the media’s preference for all-out conflict, particularly between billionaires.

The first shortcoming was the prominence of a potential showdown between Stokes and fellow media mogul Rupert Murdoch over CMH in media reports, without the acknowledgement that the very body Stokes asked to investigate this possibility could find something objectionable and block it. ACCC chairman Rod Sims has already indicated that a News offer doesn’t appear to be problematic, but News isn’t a free-to-air TV company dreaming of a pay-TV entry.

Fairfax newspapers have revealed the second shortcoming this morning. Stokes made the request to the ACCC six months ago. When the consumer watchdog said it would conduct some market enquiries, Seven told them to hold off. The knowledge of knowing the ACCC’s findings was outweighed by difficulty of media speculation. Then News came along.

While this shows that Stokes has long had plans for Foxtel – as if we need confirmation of that – it proves that for whatever reason, Seven Group wasn’t quite ready to make a move just yet.

Let’s look at the likelihood of a full bid and a higher stake. In order to secure the rest of CMH that it doesn’t already own, Stokes will have to come up with about $1.5 billion to match News Limited’s offer of $3.50 a share.

Analysts have nominated Seven as a company likely to conduct a capital raising. Stokes would probably like to bid for CMH when his company’s balance sheet is stretched.

However, The Australian Financial Review understands that the wider Seven company has the capacity to make a play for the rest of CMH if it wants to. This makes sense when you consider that Seven was asking the ACCC about it’s opinion on a full bid six months ago.

Whether the ACCC allows it to is a different matter, although the newspaper also understands that the consumer watchdog will deliver its conclusion in time for a scenario where Stokes could counter News.

Purchasing more shares appears to fit the path of least resistance; excluding the scenario where Stokes just sells out to News’ $2 billion bid at twice the price he bought in – a good result in anyone’s book.

Stokes could then use his stake to gain a direct foothold in pay TV, perhaps through Foxtel Sports Australia, instead of just cash – the greater the stake, the greater his leverage.

That way James Packer, who has the strongest negotiating position, gets his exit and $1 billion to throw at his casino ambitions in Sydney. News, with the backing of billionaire Rupert Murdoch, gets a greater share in Foxtel. And Stokes, with a minority holding in CMH, gets to convert that into something material.

But the media reports, no matter how sensational, get one thing damn right. The ball is in Stokes’ court.

CVC Asia Pacific, Nine Entertainment, Ticketek

Private equity firm CVC Asia Pacific has been forced to ask bidders for the events division of Nine Entertainment to try again after initial offers reportedly failed to meet its expectations.

According to The Australian Financial Review, CVC sent the first offers for Ticketek back after a number of them fell between $300 million and $350 million. The newspaper believes that CVC was holding out for something closer to $400 million.

Earlier reports had valued the business at $500 million.

The report says the sales process is hardly dead, but the delay gives CVC an added headache when it comes to refinancing Nine Entertainment’s $2.8 billion senior debt burden.

The debt is due in February. Nine has offloaded some of its magazine division, but CVC will come under increasing pressure to sell some other prized assets, like ninemsn, the longer the Ticketek deal drags on.

The added problem for CVC is that sales of a significant nature have to be approved by its lenders and, as has become clear, US hedge funds buying up Nine Entertainment debt aren’t inheriting a skeleton stripped bare in February 2010.

Billabong International

Billabong International founder Gordon Merchant has been called upon to step down from the board after the company’s highly dilutive $225 million capital raising.

According to Fairfax, Perennial Value managing director John Murray says Merchant’s key role in rejecting a $3.30 proposal from Kohlberg Kravis Roberts as inadequate – Merchant added that he wouldn’t accept anything less than $4 – had cost shareholders dearly.

"Dismissing any possible bid below $4 reflects poor judgment for someone who should know more about this business than anyone else,” Murray said.

The call comes as Billabong shares are due to emerge from a trading halt after the embattled surfwear company launched a capital raising at a staggering 44 per cent discount to the previous closing price.

Given Merchant’s hold over the company, it’ll take a lot more than Murray’s words to depose him. Whatever happens to Billabong, the need to reduce its retail footprint will mean there’s a lot of cheap board shorts and Havaianas floating around for bargain hunters dreaming of next summer.


Aside from the Billabong share price, another thing to look out for today that could have M&A consequences is word from recently appointed Perpetual chief executive Geoff Lloyd.

Lloyd is the third boss at Perpetual in 18 months and the ongoing weakness in the company’s strategic direction has thrust it into the limelight of takeover speculation.

This morning Lloyd is reportedly expected to reveal details about his cost-cutting plan, which will slash tens of millions from the fund manager that’s considered to be carrying too much fat. In recent years, costs have risen while revenue has been falling.

Also, look out for suggestions of asset sales ("reviews”).

The more Lloyd impresses the register today – the deeper his cuts – the better the chance he will have of imploring shareholders not to be tempted by takeover speculation that has gripped the company.

On June 14, a media report claimed that "at least one” private equity player was running the numbers on Perpetual. The report indicated that the price was something around $30, which would have been a 39 per cent premium at the time. Pacific Equity Partners was later named as an interested party.

This could be simply a case of private equity testing the loyalty of Perpetual’s register in the wake of the company’s decision to reject a proposal from Kohlberg Kravis Roberts at $38-$40 last year. Today, Lloyd has the opportunity to instil some belief in the company at $23.

Australian Securities and Investments Commission, Fairfax Media, Echo Entertainment

Australia’s corporate regulator has sent a thinly veiled note of caution to billionaires Gina Rinehart and James Packer for their tactics with Fairfax Media and Echo Entertainment, respectively,

Australian Securities and Investments Commission (ASIC) chairman Greg Medcraft told a parliamentary committee on Friday that the regulator is concerned about attempts to gain control of listed companies without paying for them.

Medcraft didn’t name Rinehart or Packer, or anyone for that matter. But, given the very public battles between the billionaires and the boards of both Fairfax and Echo, who else would Medcraft really have been referring to?

Fairfax believes that Medcraft is concerned about a principle within the Corporations Act that all shareholders are to be treated equally. The Takeovers Panel does have the ability to declare "unacceptable circumstances” when it sees fit, but Medcraft hasn’t sought the panel’s opinion just yet.

This concept the shareholder equality could play a role if Rinehart manages to secure boardroom representation at Fairfax. Because, when you’re a board member, you can’t just represent your own interests.

For more on Rinehart’s Fairfax battle, check out this morning’s edition of The Distillery.

Wrap up

If you’re concerned about the speculative nature of this morning’s M&A 'analysis,' Breakfast Deals apologises. But this news puts it into a broader context.

According to an exclusive analysis effort from The Australian, announced domestic M&A activity for the first half of 2012, which has six days left in it including today, is 54.1 per cent lower than the same time last year. It’s the skinniest six months in Australian M&A since 2009 when the market couldn’t even hang its hat on GFC ‘crisis deals’.

One M&A candidate we won’t have to talk about for a while might be Bank of Queensland, after chief executive Stuart Grimshaw ruled out a merger with regional counterparts to establish a fifth pillar in the Australian banking system. He made the comments to The Australian Financial Review.

However, one M&A target that we can’t resist here though is Qantas Airways, and this news is important. Shadow Treasurer Joe Hockey has reportedly said that a Coalition government would think about lifting foreign ownership restrictions on Qantas.

Granted, this might turn out to be irrelevant if the Gillard government wins another term. However, talk about wild speculation!

Meanwhile, mining giant Rio Tinto should have financing locked in for the expansion of the Oyu Tolgoi copper-gold mine in Mongolia by the end of the year. That’s according to comments from a Rio executive reported by Reuters.

This is crucial when it comes to what Rio decides to do with Ivanhoe Mines, which it acquired in its pursuits of majority control of Oyu Tolgoi.

Once the Mongolian megaproject is locked in, it’s thought that Rio will move more swiftly in its plans for Ivanhoe’s other assets, whatever they are.

Elsewhere in mining, Sundance Resources has just learned that the Australian Foreign Investment Review Board (FIRB) would not oppose the conditional $1.65 billion takeover offer from China Sichuan Hanlong Mining. But also, the company has received word that the families of some of the directors that were killed in a plane accident in the Congo in 2010, are planning to sue.

The families of four of the six deceased directors are seeking unspecified damages. These families represent chairman Geoff Wedlock, chief executive Don Lewis, company secretary John Gregg and director John Jones.

And finally in capital raising news aside from Billabong, iron ore developer Western Desert Resources and toy company Funtastic have tapped the market for funds, seeking $85 million and $20 million respectively.

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