Capital-raising prospect led to shareholder coup
The dumping of chief executive Brett Chenoweth and four other directors including the chairman of only six months, Peter Hunt, is the kind of action taken when a company is struggling badly. Earnings are in decline and its prospects for recovery are clouded at best.
As of 9am on Tuesday morning this team of APN governors will no longer be employed, having been forced to walk the plank by the company's two major shareholders - a struggling Irish media company, Independent News & Media plc and institutional investor Allan Gray, who together account for just over 50 per cent of the stock.
The strategies of the two camps diverged and the party with voting control got to call the shots. Make no mistake, APN's earnings are under intense pressure and neither of the protagonists in this saga would disagree.
The issue on which there is a split is whether the company's balance sheet is in such a perilous state that it needs to be repaired by raising more capital from shareholders.
The majority of the board and management had a plan to raise about $100 million and sell assets to reduce the company's $470 million in net debt. The strategy involved the issue of stock at the discounted price of 20¢ a share.
The talk in the ether suggested APN had a near immediate need to raise cash or risk being in breach of loan covenants - which are agreements the company has with its lenders upon several metrics. In this case, the concern was about the ratio of debt to earnings before interest, tax and depreciation.
Most of the now-sacked board - those that were not associated with the major shareholders - suggest the ratio of three times was too high.
It certainly is one of the highest among its peers, but analysts are not suggesting it was at risk of breaching bank covenants imminently.
But how much leeway APN had was as much a factor of its near to medium-term earnings prospects as anything else. Those in favour of an equity raising believed APN needed a capital buffer to ward against uncertain times ahead. Thus the independent majority of the board had taken the view that it needed to raise money.
The two major shareholders disagreed.
There is little doubt that the largest shareholder - Independent News & Media plc - had its own financial issues. It is struggling under its own pile of debt and a penny-dreadful share price. Its market capitalisation is now sitting at a precarious $20 million.
Thus its reluctance to stump up fresh capital to prop up its Australian associate is no surprise.
The second major shareholder, Allan Gray, has taken a big punt on challenged Australian media company shares over the past couple of years - including Fairfax - and is sitting on substantial losses on these particular punts.
It is estimated that Allan Gray's average buying price for APN is about $1.30 a share, against the current share price of 30¢ a share.
The backstory from the now-former APN directors is that the major shareholders did not have the readies to invest any more in the company and thus could not support a capital raising.
None of this came up until late last week when Independent Media issued a statement saying it no longer supported Chenoweth as APN chief executive.
The response from the board and the non-aligned directors was to support the chief executive.
Until last week the entire board are said to have supported the idea of a capital raising - which was due to be announced this Thursday along with the APN results.
The major shareholders are telling the story a different way. They say the expelled CEO and chairman were financial engineers with no understanding of media and should be replaced with experienced industry operatives.
The major shareholders contend that the decision to proceed with a capital raising was a suicide mission.
Regardless of who one believes, the fact remains that APN is under intense earnings pressure thanks to its reliance on the traditional print media assets.
It has a couple of more resilient media assets - investments in outdoor advertising and radio - but these could not offset the declining revenue contributions from print businesses in Australia and New Zealand. The migration to digital had also been an issue - as APN had been late to the game in developing that side of the business.
These are issues for the yet to be announced new members of the board and management. It is likely that one of the few remaining board members, Peter Cosgrove, will be replacement chairman - and he may need to deliver the company's 2012 full-year results on Friday.
Frequently Asked Questions about this Article…
APN's CEO Brett Chenoweth and four directors, including chairman Peter Hunt, were forced out after two major shareholders — Independent News & Media plc and institutional investor Allan Gray — who together hold just over 50% of the stock disagreed with the board. The shareholders intervened amid falling earnings, concerns about the company's balance sheet and a dispute over whether to raise fresh capital to repair the business.
The move was led by Independent News & Media plc and Allan Gray. They argued the existing CEO and chairman were financial engineers without sufficient media experience and said APN needed experienced industry operatives instead. They also opposed the board's proposed capital raising, calling that plan a risky 'suicide mission.'
The independent majority of the board planned to raise about $100 million and sell assets to reduce APN's roughly $470 million net debt. The plan involved issuing shares at a discounted price of 20¢ a share. It was controversial because major shareholders refused to support the cash call, and there was disagreement over whether APN actually needed the capital buffer given its earnings outlook.
The article states APN had about $470 million in net debt and a debt-to-EBITDA ratio around three times. Some directors felt that ratio was too high, but analysts quoted in the story did not believe APN was at immediate risk of breaching bank covenants. The risk depended largely on APN's near- to medium-term earnings performance.
Independent News & Media plc was itself under financial pressure, with a struggling balance sheet and a market capitalisation reported around $20 million, so it was reluctant to provide more capital. Allan Gray had significant losses on media bets and reportedly had an average APN buy price of about $1.30 a share versus the current share price of roughly 30¢, which also made it unwilling to underwrite a fresh equity raising.
APN relied heavily on traditional print media, which has seen declining revenue contributions in Australia and New Zealand. While it owns more resilient assets like outdoor advertising and radio, those businesses could not fully offset print declines. The company was also late to develop its digital business, which further weighed on earnings prospects.
The main disagreement was whether APN's balance sheet was perilous enough to require an immediate capital raising. The independent majority of the board and management supported raising about $100 million to build a buffer, while the major shareholders opposed that route and instead pushed for a change in management and board composition.
The article suggests Peter Cosgrove, one of the few remaining board members, is likely to be the replacement chairman. He may need to deliver APN's 2012 full-year results, which the story says are due to be announced on Friday; new board members and management were yet to be announced.
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