From One.Tel to One,Ten

IT'S 1997 and James Packer has strolled on to the set of A Current Affair to be interviewed by Ray Martin. Nothing is off limits in the breezy chat: his relationship with dad, Kerry, his love life and his competitors.

The subject turns to Lachlan Murdoch. "I know Lachlan pretty well," the boss of the company that owned the Nine Network begins. "I like Lachlan, but the reality is we're competitors. . . . in all probability for the rest of our lives we're going to be competing, so it's impossible to have a friendship with someone in that circumstance as you'd have a normal friendship."

For decades, the Packer and Murdoch families had slugged it out for supremacy in the small pond of the Australian media landscape. Newspaper wars, television battles and political influence.

But here, at the height of the Super League war, a battle that pitted the Generation Next of Australia's media dynasties against each other for control of a sport that delivered stellar ratings and profits to the Packer empire, relations were frosty at best.

Little more than a decade later, much has changed.

These days, the pair are likely to attend each other's weddings or children's christenings in a picture of harmony. They have even been spied out to dinner with their model wives as they celebrate a link beyond the media and their millions a shared birthday.

The softening of the relationship between media scions who watched and learned as their fathers battled over the media landscape and who themselves fought one battle reveals an acceptance from this generation to share the pond. War is, after all, an expensive business.

Now, in the wake of James Packer's $280 million raid on a stake of nearly 20 per cent in the Ten Network and the mooted onsale of half to Murdoch, investors are questioning the strategy to be employed and the timing and ability of the players to deliver returns to all shareholders.

After all, Packer and Murdoch have been party to an extraordinary record of value destruction in their various battles for assets and joint ventures, plus one near-death experience.

They have lost more than half a billion dollars going head-to-head as warring media tribes. They have tried joining forces to invest together, only to lose another billion.

Despite being fawned over in the press as young, rich and powerful, the fact is that for the most part when James and Lachlan have crossed swords as rivals or invested together, money has been lost. And investors are asking questions.

FOR decades, the Packers and Murdochs thrived alongside each other, rarely treading on each other's toes. As Rupert Murdoch's interests increasingly focused overseas, they seldom clashed.

Early references to Lachlan and James's paths crossing include a 1995 dinner in Darlinghurst soon after clinching a deal on behalf of their fathers to share the rights to Australian racing coverage in the Asian region. Reports from the time also refer to talk in the Packer bunker teasing Murdoch as "Laahkie", given his American upbringing and mid-Pacific accent.

But it was the Super League war for control of rugby league and TV rights later that year that pitted the scions against each other for the first time. The sport that was part of their fathers' media empires shaped the relationship.

James and Lachlan played central roles in the Super League war: the young Murdoch personally courted big-name players and addressed teams on News Ltd's vision for the game. Packer played a key part of the defence.

The Murdoch camp's raid on the best players and clubs to create its own competition, was straight from the Packer book, following Packer's successful challenge to tradition with World Series Cricket in the 1970s.

The war for rugby league was premised on providing content for pay TV. But it was a costly miscalculation. When the Packer camp stepped in to defend the rugby league establishment, a costly stalemate ensued.

It has been estimated that Super League cost the Murdoch dynasty more than $500 million, and the company is only now extricating itself from ownership control of the sport.

The battle pushed up the value of broadcast rights. In 1998, Packer's Nine Network secured the free-to-air broadcast rights for the NRL until 2007 for $13 million a year.

Years later, and only after Super League court action was settled, the elder statesmen, Rupert Murdoch and Kerry Packer, famously buried the hatchet.

But it was their sons who would make the leap to investing on the same side of the fence.

Realising that fighting a war was expensive, the Packer and Murdoch camps invested heavily together in the telecommunications venture One.Tel. Within two years, the investment would cost them $1 billion.

One.Tel is perhaps the most pronounced union of the two junior moguls to blow up, sparking an embarrassing blunder.

Worse still, each convinced their respective fathers of the merits of the investment.

James and Lachlan both sat on the One.Tel board and were central to its operations. When One.Tel collapsed in 2001, their relationship was strained.

Court hearings years later revealed Lachlan Murdoch's inability to remember key events, while questions were asked about their relationship after Murdoch shifted the focus from himself when he revealed Packer's tearful admission to him in his kitchen that the business was in trouble.

While One.Tel may have garnered the headlines, the pair were involved in another junior telco disaster.

A long-forgotten dotcom era investment involving Packer and Murdoch was COMindico and its related company Open Telecommunications.

The Packers and Murdochs were among the key stakeholders in COMindico to kick in a total of $175 million for the internet start-up. The Packers were believed to have initially invested between $10 million and $15 million for nearly 6 per cent of the company.

It was the early days of the internet and while the concept today sounds well ahead of its time given its focus on internet telephony, the business quickly went backwards.

After One.Tel collapsed in 2001, Kerry Packer's attitude to telephony cooled, and when an equity injection was sought for COMindico later that year, the Packers reportedly declined to take part. The Murdochs did.

COMindico was linked to another junior telco, Open Telecommunications, in which the Packers and Murdochs also had stakes. The Packers reportedly exited with a $100 million profit, although the Murdochs, through Queensland Press, appeared to take a bath on the investment.

MURDOCH-Packer joint investments have also made money. In 2000, they loosened the purse strings to invest alongside each other in Zurich Financial Group's new venture in Australia.

The Packers tipped in $55 million and it was believed the Murdochs invested the same amount.

James Packer took a keen interest in the investment, saying: "We like backing teams" that can deliver.

The Packers reportedly made a bucketload on the investment.

But as the pair's One.Tel failings dragged painfully through the courts, James and Lachlan's relationship showed signs of strain.

Murdoch moved to Sydney's Bronte Beach after quitting his executive role at his father's News Corp in New York and set up his own investment firm, Illyria.

The two big fish were now firmly swimming in the same pond. In 2008, they surprised with the timing of a joint buyout of the listed Packer-controlled media investment company Consolidated Media Holdings. In the dying days of the market boom and prompted by cheap debt, Packer and Murdoch seemed certain to formalise their working relationship again.

But the deal failed spectacularly when Packer played hard ball against his joint venture partner, forcing Murdoch to renegotiate with his private equity backers, who could not come up with the cash.

The deal collapsed, embarrassing Murdoch and his comeback to the big league. The relationship soured badly.

Sources close to Murdoch said: "Lachlan was really shocked. He had lined it all up and had done what he was meant to do, lost it all and got it up again, and then Packer changes the game."

Rupert Murdoch, however, was more pragmatic. Asked in an interview about the collapse of the deal that would have seen his son make his mark on the Australian media landscape, Murdoch senior, said his son had been "lucky". Debt would have crippled the business.

As the global financial crisis took hold, the pair seemed to go their separate ways.

Having pocketed $5 billion from the sale of his family's media interests to private equity, Packer had invested heavily at the top of the market in casinos, while Murdoch dabbled in investments such as toy retailer Funtastic and an IPL cricket franchise with mixed results.

Murdoch's investments in Prime Media and DMG Radio Australia, owner of the Nova radio network, marked a modest return.

It was the Murdoch and Packer family nemesis, Kerry Stokes, who appears to have sparked Packer out of his funk. Stokes had waged a bruising court battle after the collapse of his C7 pay TV arm, alleging that Packer and Murdoch interests tried to kill the business to protect their Fox Sports joint venture and conspired with Telstra to stop its channels being shown on Foxtel.

After the failure of the Packer and Murdoch buyout of CMH, Stokes raided the Consolidated Media share register to get access to an investment in the lucrative pay TV assets that rattled the Packer cage.

After settling their differences with the offer of two board seats to the Stokes camp, Packer regrouped. A fundamental redrawing of the media landscape was under way.

The Packer raid on the Ten Network is expected to deliver effective control to Packer quickly.

While Murdoch is yet to formalise his involvement in the deal, and the competition commissioner Graeme Samuel is exploring issues around the Packer acquisition given his pay TV interest, speculation is rife as to the moguls' motives and strategy.

Market watchers are sceptical about the timing and benefits for minority Ten shareholders.

Some, such as Greg Canavan, publisher of investment research bulletin Sound Money Sound Investments, think Packer's investment is overpriced and late in deducing that "there is life in free-to-air television".

"Reading the headlines, you would think that James Packer is the first person to realise this," he said. "But, if anything, he is late to the party. By all accounts the free-to-air industry is doing quite nicely following the shallow advertising recession experienced in 2008-09."

WHILE Packer has spent far less than private equity for a seat at the free-to-air table, Canavan says the price was not cheap. "Let's get one thing straight: James Packer has not purchased Channel Ten for a bargain. Based on current and expected profits, Ten is far from cheap. The company's cost base has risen inexorably year after year. Alongside weak revenue growth, this dynamic has seen Ten fall from the most profitable TV network in 2005 to one of the least profitable."

He estimates that Ten needs to generate sustained return on equity of nearly 20 per cent to justify its current share price, implying a 45 per cent jump in profit from current levels.

The appointment of the country's largest advertising buyer, Harold Mitchell, to the board of Packer's gaming interests at Crown can also be seen as an important sign. To date, Mitchell has shunned the Ten Network when distributing advertising money for his clients. Mitchell, unsurprisingly, has heralded the deal as "really clever".

RBS analyst Fraser McLeish has told clients: "We struggle to see material upside from changes to the existing strategy and believe the risk may outweigh potential reward." McLeish wrote that "new ownership structure brings new risk".

Citi analyst Justin Diddams agreed, saying "changing strategy translates to more costs. While the strategy overhaul reportedly proposed by James Packer has got the market excited, the potential earnings upside from any material strategy change is limited in our view. In simple terms, the cost of running a TV network has increased."

So what's going on? Speculation is rife about Packer and Murdoch aligning their interests in free-to-air closer to pay the TV interests of Packer's Consolidated Media and the Murdoch-aligned News Ltd (Murdoch remains a non-executive director of its parent, News Corp). It makes the strategic reasons for the acquisition crucial. The effective strategy for buying Ten may have less to do with maximising returns from that investment but protecting the Packer and Murdoch interests in Foxtel.

Analysts consider the most likely scenario will result in Packer shutting down Ten's digital sports channel One HD, effectively ruling it out as a bidder for free-to-air sports rights and thus protecting pay TV interests.

With a review of the federal government's anti-siphoning list, which has restricted popular sports going on to pay TV, the AFL has been keen for fans in New South Wales and Queensland to see games on free-to-air TV rather than pay TV, which is available in only 30 per cent of households.

If Packer shuts Ten's One HD, it eliminates the possibility and threatens the chance for NRL games to be shown on digital channels in non-league states. Crucially, it would force fans to go to pay TV.

Packer's $280 million outlay for 18 per cent of Ten pales into insignificance compared with protecting his pay TV assets.

In those circumstances, minority shareholders in Ten will need to consider if the network may be run with an eye on the performance of pay TV assets.