Rescue package with no guarantees
One can only speculate where Ten Network would be without the support of its large shareholders - in particular James Packer, Lachlan Murdoch and Bruce Gordon. Their decision to guarantee Ten's new $200 million loan facility is a financial rescue regardless of its official name.
Ten is in need of additional money for fresh investment in programming, without which the network will continue to decline.
For the Ten board the choice was to raise more equity from shareholders via some kind of share issue, or borrow. But Ten has undertaken two equity issues and there comes a point where even the most supportive investors baulk at another dilutive placement.
Avoiding this is a positive.
While the big investors in Ten supported the previous two capital raisings, there was talk that mining magnate and 10 per cent shareholder Gina Rinehart needed some convincing. She had no history of media investment until a few years ago. The elusive "editorial influence" appears to have been her motive in dabbling in Ten and Fairfax. But her moves to pressure the Fairfax board for change have also eased over the past six months.
To the extent pure returns are what any of the Ten investors have aspired to, they have failed miserably. How much appetite the big shareholders (or the institutional shareholders) would have had at this time for another capital raising has got to be questionable. While they appear to continue to support the chief executive, Hamish McLennan, Rinehart has not joined the others as a guarantor of Ten's new loan facility, although she is said to be supportive of the management strategy.
Supporting Ten would not have been a meaningful financial impost for Rinehart. Thus the snub is significant. Packer, Murdoch and Gordon don't have to put their hands in their pockets this time around and will earn an unspecified fee for their debt guarantee. Most significantly they have taken security over the assets of Ten in the event of a default.
Ten's balance sheet is pretty clean, having got rid of most of its debt. But given its earnings profile, it was not generating the cash flow to make meaningful investments in content. It was operating under loan covenants that didn't allow it a lot of head space.
Yet it needs to spend money on new programs or risk maintaining a steady decline in performance as its existing line-up fails to improve ratings and market share.
The full-year 2013 results performance was a 62 per cent decline in profit before interest and tax to $24 million, and a bottom-line loss (after exceptional items) of $285 million.
Some of these exceptionals are one-offs and others are characterised as such, but some, such as "onerous programming contracts", have been a feature in Ten results since 2011. There are around $58 million of these problem agreements and they will take a couple of years to work their way through the system.
The largest of these is the Commonwealth Games program agreement, a deal that predates the current management. As these deals take their toll on earnings, McLennan has needed to convince the board his new program strategy can correct the mistakes of the past.
The strategy of the former chief executive, James Warburton, was to plunge even more deeply into the youth market. McLennan is focused on the 25-54 market segment. Investors and advertisers could be forgiven for being confused about Ten's objective. It has moved around several times in the past three years.
The ratings performance and share of advertising are at a low low ebb and McLennan readily admits neither are acceptable.
"Removing bank covenants gives us the flexibility to capitalise on formats and programs as they come up," he says, adding you can't cut your way to glory.
From the perspective of Murdoch, Packer and Rinehart, they have invested money and reputation in reviving Ten, but (so far) for negative returns.
It seems they all recognise they need to roll the dice again. Under the previous management there was also an investment in programs but the ratings and returns were elusive.
The only big programming statement made by McLennan to date is buying cricket's Big Bash League, and there will need to be more.
Even if successful, a revival program will take a couple of years. Ratings take time to translate into earnings and investment re-rating will take even longer.
Analysts who have given Ten the benefit of the doubt for the past few years are clearly losing patience. They now probably will require runs on the board before allowing McLennan the benefit of the doubt.
He told the market advertisers were supportive of Ten's strategy of targeting the 25-54 age group. Some glimmer that ratings have improved is also useful.
But cyclical recovery stocks are easy to come by and investors are now being tempted by the float of Nine Network for additional exposure to the free-to-air television market.