Price will be bottom line in network float
For all the hype and profile, the success of the float of Nine Entertainment will come down to price. It is a classic cyclical stock with upside potential if it is sold at the lower end of expectations, the economy improves and the heat remains in the sharemarket.
This is an outcome that will suit its management and in particular chief executive David Gyngell, who has millions of shares to be granted at the issue price.
It's a stock that in a rising market can make canny investors money, but it isn't a high-dividend yield share that conservative investors want to put in the bottom drawer and forget about.
Having said that, there are no landmines in the Nine prospectus. It is fairly conservatively geared and its earnings projections are realistic. But it's not for the faint hearted.
Would-be institutional investors were insistent on the two controlling shareholders, Oaktree and Apollo, retaining most of their stakes for a year as a kind of safety net.
Ghosts of the Myer float haunt the investment community, which has a deep distrust of private equity and hedge funds engaging in a bait and switch - selling a company that looks fine but shows its real colours when they have sold out. Make no mistake, if the economic cycle moves against it, Nine, like all media companies, will suffer regardless of whether Oaktree and Apollo are there.
And in less than a year, after the full-year 2014 profit is in the bag, the two largest shareholders will have met their escrow provisions and be free to sell.
Surely this will create a nine-month-long overhang. If the Nine share price moves up 20 per cent by February these shareholders get the chance to dribble 25 per cent of their shares ahead of time. But chances are, next August 35 per cent of the stock will be looking for a home.
So, another ownership cliff may be facing the company and it will need to persuade investors that any cyclical upside will last until 2015 or beyond.
The neatest outcome would be to use the next nine months to find a cornerstone shareholder.
It has been headlined as the television company that doesn't have the print earnings anchor, and the network that is biting at the heels of top-ranking Seven Network. But in order to make this crop of new investors some capital gain, Nine needs to be priced better than the others or have some other growth factor to improve its relative return.
Gyngell has a couple of tricks up his sleeve. The first is to improve the earnings performances of recently acquired stations in Perth and Adelaide. If Nine can bring those into line with Sydney, Melbourne and Brisbane, there is some upside.
Another positive in bringing the company to market is having already made the big, lumpy (and sometimes very expensive) programming investments in sport. In some cases, such as with Rugby League, Nine was forced to make payments ahead of time.
Nine would dearly love to buy one of the regional networks but the audience reach laws won't allow this. (If the TV lobby is successful in having the reach limit abolished it's a fair bet Nine would be a buyer.)
The real upside for Nine is to increase its share of advertising revenues. It has been doing this for a while now, but at the expense of Ten rather than Seven, which has held tenaciously to its lead.
The Nine prospectus shows that every percentage-point rise in market share of the five-city network adds $17.5 million to its bottom line. If the overall free-to-air share of advertising revenue grows, it grabs another $6.7 million of profit.
Nine will get a strong tailwind only if Ten falls into an even bigger hole. Given Ten (to some extent) is now in business thanks to its major shareholders, James Packer, Lachlan Murdoch and Bruce Gordon, guaranteeing its debt, it's capacity to buy its way out of trouble seems limited.
Having said this, the risk works both ways. If Ten manages to gain some market share on the back of its recent program acquisitions (like Big Bash League cricket and the Winter Olympics) or draws a few overseas program winners (as Seven did with Desperate Housewives, and Lost almost 10 years ago), then the tide could turn.