Seven-year hitch works out for KKR

Trying to ascertain whether the private equity investor KKR made or lost money on its seven-year investment in Seven's media assets is something akin to an exercise in the dark arts of business - lots of ingredients and plenty of unknowns have gone into the mix.

At first glance it is hard to believe that the initial Seven Media joint venture between Kerry Stokes and KKR, which was struck at an enterprise value of $4 billion, did not lose money for the US group.

Parties to this deal subscribed to Seven West Media shares (formerly West Australian Newspapers) at $5.99 a share. KKR sold its stake this week for $2.21. The largest factor in mitigating any loss would have been currency. When KKR bought 47 per cent of the media group the Australian dollar was trading at about US73¢. When the last of the stake was sold on Tuesday this week it was about US98¢.

And when KKR lightened its stake in 2011 as a result of a merger-restructure of Seven and West Australian Newspapers, the dollar was trading closer to US105¢.

This explains KKR's race to sell its holding this week. The Australian dollar has been under intense pressure over the past few weeks, particularly against the US dollar. Even over this period, KKR has taken a 5 per cent hit on the value of its Seven West Media shares.

With an increasing chorus of experts suggesting the currency could move as low as US90¢, the risk of retaining the shares in Seven West Media was too large.

If KKR has made money - or even come out square - on the seven-year investment it must have made larger gains before 2011 and from the 2011 restructuring. There is a suggestion that KKR's initial loan to the venture attracted a generous interest rate.

KKR also made some gains in subscribing for a Seven West Media rights issue in 2012 at $1.32 a share. But even after averaging down the cost of the Seven West Media investment, KKR lost about 50 per cent of this investment after 2011, and this is after noting the 40 per cent improvement in Seven West Media's share price between the start of this calendar year and Tuesday.

The view is that KKR came out roughly unscathed. And it was a far superior outcome than that made by its fellow private equiteer, CVC, which lost $1.8 billion on its investment in the Nine Network. These media investments were undertaken about the same time.

Analysts are curious but ultimately not concerned about KKR's returns, because it is historical and thus irrelevant to Seven West Media's future. Some expressed surprise that the shares fell heavily on Wednesday, given that KKR's divestment should have removed the overhang in the stock.

Clearly, some investors viewed the selldown as a sign that there is more pain ahead for the media industry.

While Seven is the best performing of the TV networks and The West Australian newspaper is better shielded than other metropolitan dailies, neither are immune.

Seven West Media recently outlined moves to rationalise resources across its various media brands and is already on a $100 million cost-cutting program. Stokes installed the former Woodside executive Don Voelte to head Seven West Media a year ago and get the job going. In a couple of months Seven's head of television, Tim Worner, will take over from Voelte.

The network continues to punch above it weight when it comes to share of the TV advertising market, thanks to several years of ratings outperformance.

It will be Worner's job to stave off the advance of Nine, which is has lately been improving its ratings.

Stokes' Seven Group retains its 35 per cent stake in Seven West. It was not allowed to buy any of KKR's stock. Whether losing the support of KKR as a partner-shareholder will affect any future restructuring plans remains to be seen.