Nine's future on tenterhooks

Nine's lenders will meet today to decide whether to pursue a scheme that reconstructs its $3.3 billion or so of debts and sees its senior lenders take control of the network or to call in the administrators.

For much of this year there has been a negotiation occurring between the senior lenders, owed about $2.2 billion after the recent sale of Nine's magazine business for $525 million, and Goldman Sachs, acting on behalf of mezzanine debt investors owed just over $1 billion.

The current equity holder, private equity firm CVC Asia Pacific, has effectively lost the $1.9 billion its investors paid for Nine in 2006 so the negotiation is about how much, or how little, Goldman's investors will get in a scheme.

The key players on the lenders' side of the negotiating table are two US hedge funds, Oaktree Capital and Apollo Global Management, who own at least 40 per cent of the senior debt.

Along with other hedge funds, the two firms acquired their exposures at prices around 70 to 80 cents in the dollar.

Goldman has been trying to use its ability to veto a scheme to recover something for its investors, to whom it has a fiduciary obligation.

Originally it proposed a reconstruction that would have seen the senior lenders exchanging their $2.2 billion of debt for $500 million of cash, a continuing $1.25 billion commercial facility on normal terms and 70 per cent of Nine's equity. Its funds would have swapped their $1 billion of second-tier debt for a 30 per cent equity holding valued at something over $400 million.

Not surprisingly the lenders thought that was a bit rich given their view that the Goldman funds' exposure, with CVC's, has been wiped out.

Nine's management recently came up with a compromise proposal, which Goldman reluctantly accepted. Under Nine's scheme Goldman would receive about 7.5 per cent of the equity in a Nine which would have about $1 billion of debt and an enterprise value of about $2.5 billion.

Goldman was agreeing to another $300 million or so ‘'hair-cut'' on top of the $550 million or so that it had already been prepared to take, although it would also receive some warrants that would deliver more value if Nine were ultimately sold for more than the original face value of the senior debt. In effect, it would get between about $110 million of equity and about 12 per cent of the upside in any sale that might ultimately have seen it retrieve perhaps $150 million of its clients' $1.1 billion.

The senior lenders, led by the hedge funds, however, think that is far more than the clients' deserve. They countered with an offer of two per cent of the equity plus 10 per cent of the value achieved in any eventual sale above the $2.2 billion or so of senior debt. That's perhaps $30 million or so of equity value plus the potential upside.

The hard line has prompted Goldman to say that ‘'enough is enough'' and threaten to force Nine into administration if the senior lenders refuse to endorse Nine management's proposal, although in practice it would be Nine's board that would have to call in the administrators if the lending groups can't reach an agreement.

The bemusing aspect of this last-minute bout of brinkmanship is that, from the senior lenders' perspective, they are talking about relatively inconsequential sums – a few tens of millions of dollars measured against the billions they have on the table -- given the implications of Goldman forcing Nine into administration.

The senior lenders are said to be confident that they could recover their exposures from an administration, or perhaps acquire Nine themselves in a debt-for-equity swap negotiation with the administrator.

The downside risk is that Nine's business would be disrupted and perhaps destabilised if it fell into administration, with a questionmark over the status of some key programming contracts and speculation that Kerry Stokes' Seven West Media has been dangling a prospective safety net in front of Nine's chief executive, the well-regarded David Gyngell, offering
him its CEO role.

With the advertising market still deteriorating and Nine yet to receive the full revenue benefit from its rating resurgence this year it wouldn't be the best of times to put a television network up in a distressed sale.

The more logical option would be for the lenders to construct their own ‘'take-and-hold'' strategy via a scheme which created a viable capital structure for Nine outside of an administration with the aim of supporting it through the bottom of the advertising recession in the hope that they hedge funds can make a killing on their equity exposures in a few years' time.

The senior lenders would, even on the management's proposed apportionment of value, hold 92.5 per cent of the equity and retain 88 per cent of the upside above $2.2 billion in any eventual sale or re-flotation of Nine.

In a scheme they would have full control of their destiny. In an administration there would be additional risks and inevitable damage to the business.

For Nine's sake, and given the disparity between the value being haggled over and the overall value at stake, one would assume a compromise will be reached. The problem with brinkmanship, of course, is that there is always the potential that one of the parties will misjudge where the other's non-negotiable bottom line lies.