Southern Cross shares up on talk of merger, network switch

Southern Cross Media confirmed on Monday that it is "reviewing a number of strategic options" including a potential merger, and a change of network affiliations, in response to BusinessDay reports last week.

While not referring directly to its negotiations with Nine Entertainment, Southern Cross confirmed that with its affiliation arrangement with the embattled Ten network expiring midyear, it is exploring its options.

"The board has not, at this stage, formed a view as to any preferred option," Southern Cross said in a statement.

The company is also in talks with Nine about a potential merger that would act as a reverse listing for Nine.

While Southern Cross's largest shareholder, Macquarie Group, has been driving the merger proposal, its second largest investor, Allan Gray, said it is not opposed to a deal as long as the price is right.

"It makes strategic sense if it is done at the right price," said Allan Gray's Simon Marais.

Southern Cross noted that at this stage any merger with metropolitan TV stations, Seven, Nine and Ten, is prohibited by law.

The news gave a further boost to the Southern Cross share price which has jumped nearly 40 per cent in a matter of weeks on takeover speculation. The stock closed 5¢ higher at $1.575 on Monday, its highest close since May 2011.

If Communications Minister Stephen Conroy carries through his promise to lift rules preventing a commercial TV broadcaster from reaching more than 75 per cent of the Australian population, it is expected to trigger mergers between metropolitan broadcasters and their regional affiliates.

The lapse of Nine's affiliate deal with its regional partner WIN Television last year, and the expiry of Ten's deal with Southern Cross this June, raises the possibility of the networks swapping partners before any potential merger activity.

But there are plenty of hurdles to a scenario where Nine would dump WIN in favour of Southern Cross and use the merger as a back door listing on to the stock market.

The first is whether Senator Conroy succeeds in getting legislation passed. Then there is the issue of Nine and Southern Cross agreeing to a deal.

Nine will still need a commercial relationship with WIN to provide content to stations in Adelaide and Perth which WIN owns.

Losing Nine as an affiliate would be costly for WIN. The regional TV provider would be forced to deal with Ten which is rating at half the level of Nine in regional Australia and has shown no sign it will turn around its poor ratings.

One analyst said it raised the possibility that the exercise was "theatre" designed to extract better deals from these current partners of Nine and Southern Cross.