Rushed rule changes lose wide support
What was presumed to be an easy passage for abolishing the reach rule, which prevents commercial broadcasters from reaching more than 75 per cent of the Australian population, has turned into a dogfight, with Seven and Ten defecting from the previously unanimous industry position.
"Removing the reach rule is likely to lead to mergers," said Ten Network chief executive Hugh McLennan on Wednesday. "The way to make mergers work is to strip out costs. The people of regional Australia would suffer as a result."
Seven West Media's controlling shareholder, Kerry Stokes, has reportedly withdrawn support for all Labor's reforms - including cuts to broadcast licence fees - saying the price is too high given the increased regulation of print media and the public interest test for mergers.
The prospect of the bill's failure punched a hole in the share price of Southern Cross, which was down as much as 8 per cent on Wednesday. Southern Cross is Ten's regional partner but the affiliate deal expires in June and it is in talks with Nine about a merger if the reach rule is lifted.
According to Credit Suisse, a merger between Nine and Southern Cross could yield $50 million in synergies.
The reach rule bill has been referred to a subcommittee by Communications Minister Stephen Conroy, who unveiled the reforms on Tuesday and is pushing for a speedy resolution. But his haste has also come in for criticism.
"Parliament needs time to consider in detail changes that affect billions of dollars of investment, thousands of jobs and the future of entire business frameworks," News Ltd chief Kim Williamssaid in a speech to the Australia-Israel Chamber of Commerce.
Merrill Lynch's Sameer Chopra said the opposition to the bills suggested "there is significant debate in the sector and passage of the bills cannot be automatically assumed".
Credit Suisse analyst Samantha Carleton said: "We expect the reach rule to eventually be removed. However, we see little prospect of this occurring swiftly enough for it to form part of the current reform package."
Currently the "two out of three" test prevents a media company from having an interest in all of print, radio and television. Senator Conroy is also proposing a more subjective public-interest test which seeks to prevent media outlets that are deemed significant from concentrating their influence.
Credit Suisse believes this rule may prevent News Ltd from acquiring broadcast assets in Australia like Ten, or radio stations.
HOW THE REFORMS IMPACT THE MEDIA PLAYERS
Negative
News Corp: Public interest test; press standards body and supply agreement regulation
Fairfax Media: Public interest test and the creation of a press standards body
APN News Media: Public interest test and the creation of a press standards body
Neutral
Ten: Licence fee cut; increased regulation of supply agreements
Seven West: Licence fee cut; faces public interest test
Positive
Southern Cross: Licence fee cut; potential merger with Nine or Ten
Prime Television: Licence fee cut; potential merger with Seven West
SOURCE: CREDIT SUISSE
Frequently Asked Questions about this Article…
The reach rule currently prevents commercial broadcasters from reaching more than 75% of the Australian population. The proposed reforms would abolish that rule and also introduce changes such as cuts to broadcast licence fees, a more subjective public-interest test for mergers, tighter regulation of supply agreements, and the creation of a press standards body.
Removing the reach rule is likely to encourage mergers between broadcasters because it would allow larger national footprints. Analysts and executives say mergers could create cost synergies (Credit Suisse estimated about $50 million for a Nine–Southern Cross tie-up) but may also lead to cost cutting and regional job impacts. For investors, this means greater M&A activity could change valuations and share prices across media stocks.
Southern Cross shares fell—at one point by as much as 8%—as markets started discounting the chance the government’s package would pass. The company is a Ten regional partner with an affiliate deal expiring in June and has been reported to be in merger talks with Nine if the reach rule is lifted, so uncertainty over the bill’s fate hit its share price.
Credit Suisse and the article highlight different impacts: News Corp, Fairfax Media and APN News Media could be negatively affected by a public-interest test, a press-standards body and supply-agreement rules. Ten and Seven West Media are more neutral overall (they gain licence-fee cuts but face greater regulation), while Southern Cross and Prime Television are seen as potential beneficiaries because licence-fee cuts and relaxed reach rules could enable mergers.
The 'two out of three' test prevents a media company from having significant interests across all three platforms—print, radio and television. The reforms propose adding a more subjective public-interest test to limit concentration of influence, which could in practice prevent companies such as News Ltd from acquiring certain broadcast assets or radio stations.
Communications Minister Stephen Conroy unveiled the reforms and is pushing for a speedy resolution, but the reach-rule bill was referred to a parliamentary subcommittee for further consideration. Analysts say removal of the reach rule may still happen eventually, but they see little prospect of it being decided quickly enough to be part of the immediate reform package.
Licence fee cuts would reduce operating costs and are generally positive for broadcasters. However, tighter regulation of supply agreements and a public-interest test could limit how companies structure partnerships or pursue acquisitions. For example, Ten would gain from lower licence fees but faces increased regulation of supply deals, while Southern Cross could benefit from both fee cuts and merger opportunities if rules change.
Investors should monitor the parliamentary subcommittee findings, any shifts in industry support (the article notes Seven and Ten have defected from a previously unanimous position), announcements about affiliate deals (Southern Cross’s deal expires in June), and analyst commentary from firms like Credit Suisse and Merrill Lynch. Those events will help signal whether the reforms—and the mergers they could enable—are likely to proceed.
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