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Refinancing risk fear off the mark

Seven West Media has nowhere near enough debt to be placed in a bank hospital.

Seven West Media has nowhere near enough debt to be placed in a bank hospital.

THE massive appreciation in Seven West Media's stock over the past couple of days answers, in part, the big question around why its share price has been in the doldrums for six months. The market took the view that there was a risk the company would not be able to refinance its $1.95 billion debt.

It's not the only reason the share price has been trashed, but it is the stupidest one. One can only hope that the fund managers that had been valuing this media stock on the basis of refinancing risk are not managing your super funds.

It is one thing to be operating in uncertain times with sovereign risk producing an economic cloud over Europe and the US. It's also understandable that companies and individuals are debt averse and undertaking a massive deleveraging.

But this company, which is ultimately controlled by billionaire Kerry Stokes, has nowhere near enough debt to be placed in a bank hospital.

Those companies that got themselves into hot water back in 2007 and 2008 when the global financial crisis hit had significantly higher levels of debt, often had convoluted structures, paid dividends out of borrowings or had grossly overpaid for assets.

Seven West Media has none of these characteristics. Its level of borrowing is high relative to the medium to large listed companies in Australia, but it can cover its interest bill three times over out of the cash it generates from operating a group of media assets that are properly valued in the balance sheet. It can even pay down some of this debt using its cash flow.

There are plenty of banks out there wishing there were more Seven West Medias.

The trouble for many banks (in particular the big Australian banks) is that large companies spent two years of the GFC getting rid of debt and are not prepared to take on any more in order to invest in their business.

Companies simply don't need money for capital expenditure because (other than resource stocks) they are nervous about the outlook for the local and international economy.

Fear of double-dip recession in Europe and the US is understandably promoting a level of caution.

Increasingly we are seeing companies undertaking buybacks to trim bloated balance sheets and improve returns on equity. CSL yesterday undertook the new buyback program for $900 million of stock.

This frugal conservatism doesn't work for the cashed-up banks that are looking for customers, both consumer and corporate, to start borrowing again.

It's more likely Seven West would have been bowled over in the rush of banks happy to have a deal.

This overlay of refinancing fear is now no longer a factor weighing on the share price. But it was never the only price anchor.

There is also a level of market mistrust around Stokes a dislike of his corporate restructurings and a nervousness about being a minority shareholder in the listed companies he controls.

The $1.9 billion debt inside Seven West Media is a legacy of one of these related party asset reshuffles. Seven West Media (once West Australian Newspapers) was created in April when the previously undergeared WAN acquired media assets controlled by Stokes and private equity firm KKR.

Last year Stokes's publicly listed media investment company acquired his private Caterpillar equipment operations. This company, now called Seven Group Holdings, together with KKR owns just over 40 per cent of the shares in Seven Media Group.

(Despite this cynicism it must be said that the minority shareholders in both these deals voted to approve them.)

The bigger issue for Seven West Media is that it's the proud owner of a suite of traditional media assets under threat from new media entrants and operating in a lacklustre advertising market. Most other companies in this basket are also seeing their shares slump trading at price earnings multiples so low that they suggest little or no short to medium-term growth.

While Seven West Media has been at the lower end of the price-earnings range, the earnings performance of its Seven Network has been better than its competitors. The print assets of WAN were sluggish but slightly protected from decline, thanks to its monopoly position in the West Australian market.

In terms of the overall media sector, 2011 demonstrated clearly that print was feeling the pain more than television and radio.

But investors appear not to be differentiating. Media stocks are being trashed in the current environment regardless.

But even with these headwinds the assets of Seven West Media have never looked sufficiently troubled that the company would have difficulty servicing the interest payments.

If the share price fell low enough it would be more likely that Stokes would come along and privatise it on the cheap.


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