Just a matter of time for TV mergers
Jeffrey Browne's resignation this week as chairman of the commercial TV networks' representative body, FreeTV Australia, sends a clear signal that while changes to media ownership rules are on ice, there is still heat being generated by the potential wheeling and dealing that could follow any reforms.
Mr Browne, the head of the Nine Network, paid the price of the fractured support among commercial television networks for removal of the 75 per cent reach rule, which prevents mergers between metropolitan and regional broadcasters.
While Nine's rivals may beg to differ, the bust-up confirms two things: the removal of the 75 per cent reach is only a matter of when, and its delay has not killed off a potential merger between Nine and Southern Cross Media, although the odds on the latter have lengthened considerably.
One issue is the window of opportunity that has opened for Nine and Southern Cross, which threatens to wreak havoc on the broadcast market - in particular on their current partners, billionaire Bruce Gordon's WIN Television, and Ten.
Nine and WIN's affiliate deal has been on a rolling contract since the middle of last year when their previous deal expired amid uncertainty over the media group's future. Ten's regional affiliate deal with Southern Cross expires at the end of June.
If the reach rules were lifted last month, as initially proposed, nothing would have prevented a switch and merger of Nine and Southern Cross by midyear. The indefinite delay complicates a path that was never easy to start with, but the potential pay-off is clear.
For Nine, the merger would allow it to share in the bonanza for Southern Cross' regional television stations, which would get a massive ratings and ad revenue boost.
RBS Morgans has said a merger between Nine and Southern Cross could generate an extra $50 million a year in earnings before interest, tax, depreciation and amortisation from switching affiliations and cost savings from merging the TV operations. This would represent an additional $400 million in value for Nine and Southern Cross shareholders if the government succeeds in lifting the reach rules and the merger goes ahead.
No merger means that Southern Cross shareholders will get all the benefit of Nine's better-rating programming, while Nine gets left with the task of keeping things sweet with WIN, which owns Nine's metro affiliates in Perth and Adelaide.
It is these sorts of complications that have led analysts to say both parties might be using the talks as "leverage" against their current affiliate partners.
Other permutations are possible: Nine's reduced metro presence could allow it to get a deal over the line now if the merged entity is prepared to sell a few stations and stay within the 75 per cent reach rule, although Nine insiders play down this option.
Could both the parties wait for the changes to pass through after the election? One fly in the ointment is the cost of Southern Cross rolling over its contract with Ten while the stars align. The regional broadcaster will pay a penalty, with its affiliate fees rising 25 per cent until a new deal is signed with either Nine or Ten. This will add insult to injury given the poor state of Ten's ratings so far this year.
Nine sources also poured cold water on the idea that the network may pursue a separate listing later this year. Such a proposal would do more for the coffers of the investment banks than it would for Nine's new owners, given the network's earnings still reflect a low point in the television ad cycle.
Frequently Asked Questions about this Article…
The article says Jeffrey Browne, who heads Nine Network, resigned after fractured support among commercial networks over removing the 75 per cent reach rule. His resignation signals tensions within the industry and suggests renewed momentum and negotiation around possible TV mergers, even though formal rule changes are delayed.
According to the article, the 75 per cent reach rule prevents mergers between metropolitan and regional broadcasters. Lifting that rule would clear a major regulatory obstacle to combinations such as a potential merger between Nine and Southern Cross Media.
The article explains the delay to changes in media ownership rules has lengthened the odds but not killed off a possible Nine–Southern Cross merger. Removal of the reach rule is described as ‘a matter of when,’ so a merger remains possible but more complicated while reform is on hold.
RBS Morgans is cited in the article saying a merger could add about $50 million a year in EBITDA from affiliation switching and cost savings, potentially creating roughly $400 million in extra value for Nine and Southern Cross shareholders if the reach rules are lifted and the deal proceeds.
The article notes a merger or affiliation switches could disrupt current partners: Nine’s affiliate deal with WIN has been on a rolling contract, and Ten’s regional deal with Southern Cross expires at the end of June. Changes could create negotiating leverage and uncertainty for WIN and Ten.
The article warns that if Southern Cross rolls over its deal with Ten while waiting, it would face a penalty — affiliate fees would rise 25 per cent until a new deal is signed with either Nine or Ten — adding cost pressure amid Ten’s weak ratings this year.
The article outlines other permutations, including the possibility that a merged entity might sell a few stations to remain within the 75 per cent reach cap, though Nine insiders reportedly downplay that option. Analysts also suggest talks may be used as leverage against current affiliates.
The article says Nine sources poured cold water on the idea of a separate listing later this year, suggesting that a flotation would likely benefit investment banks more than Nine’s new owners given the network’s earnings still reflect a low point in the TV advertising cycle.
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