Just the ticket for Nine

This time last year David Gyngell orchestrated what many deemed impossible: pulling the Nine Entertainment Company out of a perilous debt situation. Then-owners CVC were staring down the barrel of a $2.3 billion debt payment due within months by main lenders Oaktree Capital Management and Apollo Global Management converting their owed funds into a combined 95.5 per cent equity position in the group, with Goldman Sachs taking a small 4.5 per cent stake.

Gyngell was jubilant. Why wouldn’t he be? In his words, “Nine (was) back … And back in a huge way with zero debt.” To top it off, Gyngell also welcomed his first child into the world the very same day. Not a bad day's work.

Which means this week Gyngell has two big tasks. One, he will need to help organise his son’s first birthday party. Secondly, he is the point person in selling the future prospects of the Nine Entertainment Co to investors as the company pursues what will be the largest Australian IPO of the year.

The first thing you notice when reviewing the prospectus is that Nine is no longer debt free. It has over $798 million in gross debt, and $517 million in net debt once cash and cash equivalents are taken into consideration.

While this is relatively low debt to be carrying compared to some in the industry – Seven West Media was carrying $1.48 billion in borrowings as of June 30 – Nine’s spending has raised some eyebrows. CVC basically walked away from the company and, in the process, wrote down over $5 billion in what has been reported as the largest private equity loss in the Asia Pacific region ever.

It’s the economics of the new media paradigm that investors are most keen to understand in order to judge the appeal of the Nine offer. For all its diversity, Nine is still heavily reliant on the fortunes of its TV business. It contributes 78 per cent of the group's revenue and 75 per cent of the group's earnings before interest, tax, depreciation and amortisation.

Television is a capital-intensive business, and one that appears to be moving into a two-tiered programming environment. On one hand you have the scarce and valuable products – key sports franchises, evening news and current affairs and high-rating, live-entertainment reality franchises. On the other, you have basically everything else – US imports, light entertainment, local drama and comedy.

The costs for all programming appear to be going up, but the furious bidding around key sports and reality franchises is taking a lot of the margin out of the business. In 2011 the EBITDA margin for the Nine Network was 24.1 per cent. For the fiscal year 2014, the company is forecasting it to be 19.2 per cent.

Where will Nine Entertainment Company draw future growth from if the TV business continues to experience margin erosion as a result of frenzied competition? Can the Nine Events and Nine Digital divisions fuel significant future growth?

The interesting thing about Nine Entertainment is the diversity within the group – it is reliant on advertising but not wholly reliant. In Ticketek it has a large scale; it is a market leader in an area that has plenty of upside. For that reason the Events business is an area worth a much closer look.

NEC predicts that in fiscal 2014 events will be the main source of growth, forecasting EBITDA of $67 million (a 17.5 per cent increase on fiscal 2013 actuals). At the heart of Nine events is Ticketek – which has the majority of key venue ticketing deals across Australia – as well as Softix, Nine Live and the Allphones Arena venue.

The main areas Nine can develop this is through better leveraging the significant data troves and user information that the Ticketek business has accumulated over time. It is understood Nine is actively seeking to integrate advertisers closer into the Ticketek platform and is looking to secure large-scale, multi-year integrated partnerships that straddle both CRM and above-the-line advertising across the group's assets.

Also, the success of the One Direction tour and the spinoff activity around it should give investors optimism that Nine has the fit and assets to bring something new to this space. Nine brokered the One Direction deal with Coles, which benefited the entire group, and demonstrated that its scale and broadcast reach can bring the acts it tours larger benefits than pure-play event promoters.

The live entertainment event space is a $1.2 billion-plus industry in Australia and is relatively unsophisticated when it comes to advertising and commercial rights. If Nine can scale this business quickly through a higher volume of tours, it raises the potential of lucrative sponsorship and advertising deals around high-profile talent. It would be worth Nine looking to acquire an established domestic tour promoter to fast-track supply.

A large-scale promoter acquisition, combined with Ticketek, Nine Rewards and Nine Entertainment’s media footprint would create a significant live entertainment business that would be unmatched within Australia and have a competitive position that would be difficult to duplicate.

Some investors would have been surprised to see that digital is such a modest contributor to the group's EBITDA, despite the size and position of Mi9.

Despite digital being see as a key pillar of the business, the prospectus is light on strategic detail around the future of digital, despite a line around looking to monetise the cricket digital rights via advertising and subscriptions.

The main cause of the low EBITDA contribution is due to Nine and MSN dissolving their partnership and Nine taking full ownership of Mi9, which will create a forecast $18 million EBITDA hole in fiscal 2014 compared to the prior year as a result of the removal of the Microsoft-owned assets and revenue.

A key challenge for Mi9 is to increase yield through improving cross-division data sharing. Ticketek and Nine Rewards have valuable user data that Mi9 can use to ultimately improve ad relevance and yield. Better use of data and higher value ad products are critical success factors for Mi9.

With this IPO, Nine is demonstrating that right now it is probably the most interesting media company in Australia. Sure, it is right now heavily reliant on its TV revenue, but in Nine Events it has an asset of size and sophistication none of its TV competitors can currently match. The key is working out how all these parts work together. Right now this appears to be a work in progress but if Nine can find a way to make it really function effectively and efficiently as a collective they will have an incredibly interesting unique media business. The opportunity is significant if they can pull it off.