Just a matter of when 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.
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 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 payoff 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 complications like these 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.
Nine sources also poured cold water on the idea that the network might pursue a separate listing later this year. Such a proposal would do more for the coffers of investment banks than 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 75 per cent reach rule prevents mergers between metropolitan and regional broadcasters by limiting a single broadcaster's reach to 75% of the Australian population. According to the article, this rule has been the main barrier to a potential merger between networks such as Nine and Southern Cross Media.
Jeffrey Browne, the head of the Nine Network and chairman of FreeTV Australia, resigned after fractured support among commercial networks for removing the 75% reach rule. The article says his resignation signals that proposed rule changes are on ice for now, but it doesn’t mean the idea has been killed off — the removal of the rule is still seen as 'a matter of when.'
The article notes the delay has lengthened the odds of a Nine–Southern Cross merger considerably, but it hasn’t eliminated the possibility. The indefinite postponement complicates the timeline and increases costs and contractual challenges, but analysts still consider a future merger feasible if the rules are eventually lifted.
RBS Morgans estimated a merger could generate about an extra $50 million a year in EBITDA from switching affiliations and TV operation cost savings. The article cites this could translate to roughly $400 million in additional value for Nine and Southern Cross shareholders if reach rules are lifted and the merger proceeds.
A switch or merger could disrupt existing affiliate relationships. The article explains the deal would threaten WIN Television (which is Nine’s metro affiliate owner in Perth and Adelaide) and Ten, because Nine could switch affiliations and capture a ratings and ad revenue boost in regional markets currently serving Ten or WIN.
If Southern Cross rolls over its contract with Ten while waiting for regulatory change, it will face higher costs: the article states its affiliate fees would rise 25% until a new deal is signed with either Nine or Ten, adding financial strain given Ten’s weak ratings.
The article says that one possible permutation is a merged entity selling a few stations to stay within the 75% reach limit, which might allow a deal to proceed now. However, Nine insiders are reported to play down that option, suggesting it’s not a likely favoured route.
According to Nine sources cited in the article, pursuing a separate listing later in the year is unlikely. The piece says such a proposal would likely benefit investment banks more than Nine’s new owners, given the network’s earnings are still at a low point in the TV advertising cycle.
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