League left trailing by TV's troubles

Since the signing of the AFL's record TV rights deal last year, the situation for Australia's free-to-air-networks has just got worse. It will be a tough ask now for the ARL to extract similar value.

With hindsight, the timing of the AFL’s record-breaking $1.25 billion broadcast rights deal last year was fortuitous. Unhappily for the new Australian Rugby League Commission, it hasn’t been as lucky.

Since the AFL deal with Foxtel and Seven was struck last April, the environment for all media businesses, including the free-to-air networks, has changed markedly, and not for the better.

Ten, which is not expected to be a major player in the bidding for the free-to-air component of the rights, last month announced a $200 million equity raising to shore up a balance sheet undermined by a decline in its earnings. In April it reported a 40 per cent slump in earnings before interest and tax after an 11 per cent fall in television revenues. Last month it said the revenue decline for the nine months to May had worsened, to 12 per cent.

Ten, under new chief James Warburton, is engaged in a turnaround strategy that will take several years at least to execute.

Seven West Media’s share price has plummeted since April, when it revealed it expected earnings before interest and tax this year to be between $460 million and $470 million, well below the market’s $500 million expectation. In April Seven shares were trading around $4. Today they are worth about $1.60 and the market is signalling that Seven needs a capital raising as insurance against breaching its banking covenants.

The real worry for the ARL, which has anticipated getting something similar to the AFL for its broadcast rights, however, is Nine.

Nine is the current holder of the rights, has first-and-last rights to match competing proposals and is the obvious party, with Foxtel, to pay a full price for rights that deliver very substantial audiences in NSW and Queensland.

While the television network appears to be performing well in the circumstances, and generating surprising ratings momentum, Nine Entertainment, owned by private equity firm CVC Asia Pacific, is hopelessly over-leveraged and facing a deadline of February 13 next year for the repayment of the $2.8 billion senior debt component of its $3.8 billion of debt.

With its earnings before interest, tax, depreciation and amortisation around $360 million last financial year, it will go perilously close to breaching its debt covenants when it presents its accounts to its bankers in September. That’s a minor issue – a breach simply means it reports more regularly to them – but is reflective of the mounting pressure.

CVC, with Goldman Sachs, which manages the funds holding most of its $975 million of mezzanine debt, has been trying to organise a restructuring and partial refinancing of the senior facilities but, despite some interest from private equity-type organisations, appears to have struck out.

It doesn’t help CVC and the $1.9 billion of equity its funds haves locked up within Nine that nearly 60 per cent of the group’s senior debt is now held by hedge funds that bought it from the original banks at prices ranging from about 70 cents to 90 cents in the dollar.

Two of those funds – Oaktree Capital and Apollo Global Management – own $1 billion of the debt and are agitating for a debt-for-equity swap that would effectively wipe out CVC’s investment and give them control of Nine.

While the senior debt isn’t due to be repaid until next February, the fact that the ARL is already talking to the networks about the broadcast deal adds to the urgency to do something to restructure the debt around what is a well-managed and performed network. Nine chief executive David Gyngell has done a very creditable job in difficult circumstances.

The problem for Nine may be that it would be very difficult for the ARL to negotiate a deal, whether it is five years or just two, with a corporate entity that might be tipped into administration while the ink is still fresh on the contract, no matter how unlikely it is that either CVC or the hedge funds would actually allow that to happen.

It is possible that Nine could get its lenders to provide some form of guarantee/credit enhancement to reassure the ARL, but that’s another complication and another potential point of leverage for the hedge funds. Both CVC and the funds would recognise it is in all their interests to protect Nine’s television business and the momentum it has been building.

It is conceivable that the ARL rights will be a catalyst for an early solution to the stand-off between CVC and the hedge funds and a resolution of Nine’s unsustainable balance sheet issues. If Seven – the obvious challenger to Nine for the rights – were to raise some equity and strengthen its position, that pressure could intensify.

The weakened position of the networks, the very soft advertising market, the view that Seven and Foxtel overpaid for the AFL rights, Nine’s woes and the reality that the ARL needs the networks to impose pressure on Foxtel and maximise its contribution might mean that the ARL opts to do a shorter term deal, rather than the AFL’s five-year package, in the hope that conditions improve. There is a strong view within the corporate sector that won’t occur until after next year’s election.

Fundamentally what the ARL needs is for the networks – all of them – to be in a much stronger financial position than they are today.

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