Southern Cross watchers get starry-eyed

There's plenty of appeal in a Southern Cross deal with Nine, media laws permitting. But that tie-up's not a foregone conclusion – and the network could even see more upside in a merger with Ten.

Whenever there is a mooted change of media ownership laws the manoeuvring within the industry begins. With Stephen Conroy having flagged the abolition of the 75 per cent audience reach restriction for the free-to-air networks late last year it is natural that Southern Cross Media, and others, are considering their options.

Southern Cross today confirmed a report in The Australian that it was reviewing its strategic options, while noting that under the current legislative framework any merger between South Cross and any of the metropolitan television networks was effectively prohibited. It also said its board had not, at this stage, formed a view as to any preferred option.

The proximity of the prospective relaxation of the restrictions on audience reach – Conroy is expected to introduce legislation to federal parliament within weeks – and the fact that Southern Cross’s content affiliation agreement with the ailing Ten Network expires mid-year dictate that the group’s board consider its options.

There has been speculation that Southern Cross has been talking to Nine Network’s David Gyngell about a merger which would bring together Nine’s strength in metro TV with Southern Cross’s regional presence and its market-leading Southern Cross Austereo radio network.

Southern Cross would be acutely aware that because of its affiliation with Ten its programming and its fortunes in TV are hitched to the weakest of the three commercial networks, with Ten seemingly in a disastrous spiral of falling ratings and revenues during a period of structural change in the sector overlaid by a general cyclical downturn in media advertising.

There would be some appeal in shifting its affiliation to a resurgent Nine, or considering a full-scale merger that would bulk up and diversify Nine in anticipation of its eventual sharemarket re-listing after its radical capital reconstruction last year. For Nine ownership of its regional affiliate would, at the right price, inevitably be preferable to the revenue and cost-sharing models created by the cap on audience reach.

Nine already has an affiliate – Bruce Gordon’s WIN Corp – although Gordon’s 14 per cent shareholding and board seat at Ten might suggest he has taken out some insurance against being displaced by Southern Cross. Being forced out of the Nine relationship and into a tie-up with Ten, however, wouldn’t be a financially attractive prospect for WIN given the contrasting performances of the networks.

Seven Network would presumably be running the numbers on its regional affiliate, Prime Media, as it considers the opportunities that a change to the law might present. Seven has a solid relationship and a shareholding of more than 11 per cent in Prime, whose major shareholder (with a 30 per cent interest) and chairman is Paul Ramsay.

It isn’t a foregone conclusion that Southern Cross would desert the sinking Ten network to merge with Nine if the legal framework changed.

It is roughly the same size as Ten (it has a fractionally bigger market capitalisation) and it, and its 25 per cent shareholder Macquarie Group, might see more upside and influence in a merger with Ten if it believed Ten was salvageable.

Every time there has been a change in media laws in the past it has created a lot of strategic activity and inevitably winners and losers, perhaps more of the latter than the former. This time, assuming there is a change to the audience reach permitted, is likely to be no different.