Southern Cross tunes in to Nine Entertainment

Speculation is increasing that Southern Cross Media has the Nine network in view.

Summary: The Nine TV network could be re-listed if rumours of a possible merger with Southern Cross Media reach fruition. However, such a deal would require changes to existing legislation.
Key take-out: Southern Cross shares have risen on the speculation. A change to broadcasting rules could have a substantial impact.

Key beneficiaries: General investors. Category: Portfolio management.

Southern Cross Media (SXL)

There is ongoing speculation about a possible merger between Southern Cross Media and Nine Entertainment, which could see Nine reappear as a publicly listed company. I don’t see much of a downside for Southern Cross, but there could be a decent upside if a deal goes ahead.

Really, it’s only a matter of time before Nine gets re-listed, and I think with the recent strength in the stockmarket, there will be a move to get it re-listed sooner rather than later.

The rumours of talks with Southern Cross indicate that Nine may consider a backdoor listing, or a reverse takeover, where essentially Nine gets vented into Southern Cross for an issue of new shares.

But current media laws, which prevent a commercial TV network broadcasting to more than 75% of the population, are an issue. Communications Minister Stephen Conroy is considering abolishing this rule following last year’s media Convergence Review. The fact that Southern Cross approached Nine with this idea indicates it is obviously quite confident that Conroy will change the rules.

I see this as a chance to buy into Southern Cross. It’s already risen about 20 cents on the rumours and is trading at near-term highs – but then again, so are a lot of stocks at the moment.  I don’t see there being much downside if a deal doesn’t go ahead, maybe 10 cents. But the upside, if Conroy changes the rules, could be quite substantial. I think Southern Cross could hit $2 if a deal is done.

Ten Network (TEN)

Staying with media, and it came to light this week that Kerry Stokes has acquired just under 5% of Ten Network. I find this quite astonishing really. It would be virtually impossible for Seven and Ten to merge. I really don’t think Stokes is buying shares in Ten with the prospect of a merger. I suspect he thinks it’s an undervalued stock and has seen the worst. I think it is just a personal portfolio investment for him.

On that basis, if you can get beyond the fears about the future of free-to-air TV, this might be one to consider as a speculative buy. It’s got all the big hitters on the share registry: James Packer, Lachlan Murdoch, Gina Rinehart, Bruce Gordon, and now Kerry Stokes.

It’s an obvious risk. Ten just appointed a new CEO, Hamish McLennan after getting rid of James Warburton, who was in the position for just a year. No-one knows yet if McLennan will do a better job and bring back the viewers, so buying into Ten now is taking a punt. But at the same time, the advertising market has probably bottomed out at this stage. There are quite a few signs of economic improvement, which advertisers could do well out of. To be honest, Seven is a safer bet for those looking to get into media, but for those looking for a punt, Ten is one to look at.

Australian Infrastructure Fund (AIX)

Last week, it was revealed that Australian Super is threatening to sue the Future Fund over the proposed sale by Australian Infrastructure Fund of its interests in Perth Airport. Australian Super says the sale is in breach of the relevant shareholders’ agreements. Following the news, AIFs share price has fallen from about $3.11 to $3.06. Despite the tension between the different groups, I’m certain this deal will be completed.

There’s no doubt that the Future Fund ruffled a few feathers when it overbid for the airports that have pre-emptive rights and underbid for those with no pre-emptive rights. Overall, the Future Fund is paying the right price for the total assets, but looks to be deliberately overpaying for certain assets to deter any other group from submitting a rival bid. Australian Super may not agree with this, but AIF says it finds the claim baseless and is proceeding with the sale.

I think if Australian Super takes further action it could potentially delay the process, but it will still go ahead in the end. The only risk is the net present value of the payouts could decline if the payment process is delayed. Shareholders are expecting to get between $3.19 and $3.23 cash, with the bulk of the pay-out expected in April, and the remainder between June and December. Investors are essentially making a 4-5% return – not much but there’s also not much risk involved. This deal will go ahead.

Echo Entertainment Group (EGP)

Echo Entertainment was previously mentioned as a potential target when Crown and Genting both applied to increase their holdings in the group to 25%. It was revealed this week that Genting has bought a site on the Las Vegas strip for $350 million and there are concerns that if Genting is moving into Las Vegas, it may no longer have any interest in Echo. My view is that Genting has $2.3 billion to hand, and it can probably afford to invest in both.

Remember, Genting was only interested in holding a stake in Echo, not necessarily a takeover.

Another issue muddying the waters on this one is whether or not Crown will get permission to build a second casino. Echo currently has a monopoly in New South Wales, but if the state government decides to grant Crown permission to build a casino, Echo as an asset will be worth considerably less.

For me, Echo remains at the speculative end of the portfolio because of the need for governmental approval and so forth, and betting on what governments might or might not do can be a bit of a mug’s game.

Billabong (BBG)

Both bidders for Billabong – the first led by Billabong executive Paul Naude and Sycamore Partners, the second a consortium led by VF Corp – have extended due diligence, but are expected to have it completed this month. I think a deal could be done here, and the recent lift in retail sales and consumer confidence should help its case, but personally, I wouldn’t want to buy in until there is actually something firm on the table.

At the moment we just don’t have that and there have been so many deals announced that are subject to financing, due diligence et cetera, that then fall away, it just makes it too hard.  There are other, better stocks to invest in.

Woodside Petroleum (WPL)

Finally, there are whispers doing the rounds that Shell is getting ready to sell its stake in Woodside. These rumours have been circulating since Shell sold off 10% of its holding in late 2010, but Woodside’s share price has started to strengthen after being stuck around the $33-mark for some time. It looks to me like Shell wants to take advantage of the higher price.

It’s only a rumour, but if it went ahead, it could be good for Woodside. Either Shell sells to one party and there’s a bid, or they break up the stake, which would actually increase Woodside’s free float and lift its weighting in the portfolio. Subject to oil and gas staying around current prices, I think whatever Shell does – whether it breaks it up or sells it to just one buyer – is actually a positive.


Tom Elliott, a director of Beulah Capital and MM&E Capital, may have interests in any of the stocks mentioned.

Takeover Action February 28-March 6, 2013

DateTargetASXBidder(%)Notes
13/02/2013Central Australian PhosphateCENRum Jungle Resources0.00
27/02/2013EngencoEGNElphinstone Group63.27
18/12/2012Firestone EnergyFSERange River Gold0.00
20/02/2013Gujarat NRE Coking CoalGNMJindal Steel & Power26.75
4/03/2013LinQ Resources FundLRFIMC Resources94.30FIRB approves. Ext to Mar 15
4/03/2013Neptune MarineNMSMTQ Corp84.37Unconditional
18/02/2013United OrogenUOGIron Mountain Mining22.93Unconditional
Schemes of Arrangement
24/12/2012Avocet ResourcesAYELion One Metals0.00
28/02/2013EndocoalEOCChina Yima Coal/Daton Group0.00Approved
26/02/2013SkywestSXRVirgin Australia0.00SCI, Singapore, approves. ACCC clears offer. Vote Mar 13
30/01/2013Sundance ResourcesSDLHanlong Mining Investment17.99Meeting adjourned. Date TBA
Foreshadowed Offers
1/02/2013BerkleeBERBrett Jones - managing director0.00Offer to takeover certain assets
14/01/2013Billabong InternationalBBGAltamount/VF Consortium0.00Due diligence
19/12/2012Billabong InternationalBBGExec Paul Naude Consortium0.00Due diligence
4/12/2012GraincorpGNCArcher Daniels Midland19.90Revised indicative offer
5/03/2013Westside CorpWCLUnnamed parties0.00Discussions continue
28/02/2013WHK GroupWHGSFG Australia0.00Non-binding indicative proposal. Discussions continue
Source: NewsBites