Spruced-up Nine fattened and ready for market
The network's private equity owners are keen to sell out and analysts agree the timing is right, writes Colin Kruger.
'There is a deal."
A year has passed since Nine Entertainment boss David Gyngell made the famous victory cry announcing he had helped save Australia's oldest television broadcaster from collapse at the hands of the warring rabble of vulture funds and private equity groups which controlled Nine's future.
The deal was crystallised in February.
The private equity group CVC Asia Pacific, which overpaid James Packer for the media group, had its $2 billion investment wiped out. Lenders owed $3.4 billion swapped debt for ownership of the company.
The loans that threatened to choke the media group were wiped away and Nine enjoyed a miraculous return to health with zero debt.
"All those doomsayers out there are going to have to eat their words," Gyngell said after emerging from days of tense negotiations with lenders. "We've never had a more powerful balance sheet. We're ready to rock and roll for next year."
One year later, Gyngell has another deal which will involve plenty of rock and roll, only this one won't be confined to New York hedge funds and Sydney's investment bankers.
After completing a slick renovation job worthy of Nine hits like Backyard Blitz or The Block, Gyngell will soon be the face charged with selling the miracle of Nine's redemption to the public in what promises to be the biggest float in years.
Barely eight months after taking ownership of Nine, its current shareholders will meet 10am Monday at the Park Street offices of law firm Gilbert + Tobin. Coincidentally, it was the scene of the acrimonious brinkmanship last year which almost consigned the broadcaster to the financial scrap heap.
This will be the first, and last, annual general meeting under its current ownership structure. The agenda includes the re-election of directors including former treasurer Peter Costello. Unpleasant reminders of Nine's financial misery under its previous owners will be expunged with a shareholder resolution to approve a reduction of share capital to wipe out $2.19 billion worth of accumulated losses.
Shareholders will also rubber stamp a resolution to add $1 million to the bucket for directors' fees, increasing the pool to $3 million in the cosy confines of the law firm's boardroom rather than in the public glare that is the bane of publicly listed companies.
Other points of business at the annual meeting include a share split that will increase the shares on issue to 800 million ahead of the float. A further 120 million new shares are expected to be issued to sell into the float.
Crucial details are expected to be approved at this meeting. This includes how many Nine shares will be offered for sale, and at what price.
Shareholdings have changed since the restructure was approved in February.
Oaktree and Apollo have apparently acquired shares from other investors and lifted their combined 37.4 per cent shareholding to about 54 per cent. The expectation is they will retain a 40 per cent stake post-float, with the stock in escrow for a year.
The sale of the 120 million new shares is expected to reduce debt - which has grown prodigiously since Gyngell's declaration of fiscal fitness 12 months ago - to about $600 million, or twice the company's forecast earnings before interest, tax, depreciation and amortisation (EBITDA) for the current financial year.
It should be no surprise that most of the $900 million or so in Nine's debt balance has been used to pay out its owners. The day the restructure was approved by the courts early this year $700 million worth of debt was raised, with $570 million paid straight out to investors.
Not all of the money went as spoils to the victors though.
Even while Nine was on life support, Gyngell was pulling off audacious deals like the billion-dollar NRL rights to ensure the network stayed in the big game of narrowing the gap with Seven and kept Ten in the dog house.
Of course, Nine could have come to the market much sooner if Gyngell had pulled off another high stakes caper.
In March this year, Fairfax Media revealed that Nine was in talks with Southern Cross Media, the regional affiliate of Nine's struggling rival, Ten, in a deal that could have seen the two merge. Nine would have achieved a backdoor listing through Southern Cross and shared in an estimated $400 million bonanza of value created by the deal.
The talks unravelled when the Labor government failed to abolish the reach rules which prevented metro broadcasters merging with their regional counterparts. The brief window of opportunity Nine and Southern Cross had to consummate a deal closed and they were forced to stitch up affiliate deals with their incumbent partners, WIN and Ten respectively.
The talks may still have served Nine well. The media group's subsequent affiliate deal with WIN included the acquisition of the Nine stations in Perth and Adelaide for $370 million, giving Nine a truly national metro network for the first time.
Nine also backed up its generous NRL deal with the retention of the cricket rights for $400 million in cash and $50 million worth of contra.
Combined with the takeover of Nine's digital joint venture with Microsoft, Mi9, it gives Nine a costly but much more complete offering for its prospective investors who are being offered a strong No.2 network with built-in ratings grunt via the cricket and rugby league.
"They didn't have a choice," says Fusion Strategy Steve Allen of the exorbitant price Gyngell paid for the top tier sports. "He paid what he had to pay to keep the others out. If they lost either of these properties, the IPO would be much more difficult."
While the "halo effect" of winning these sports cannot be underestimated - a reference to the effect these big events have in increasing viewers across the network - the amount of money made from the sports themselves is becoming marginal.
Fusion expects Nine's NRL coverage might not actually achieve break even for the network under the deal, and the cricket broadcasts will no longer be the highly profitable business it was under the previous deal.
It is one of the factors that needs to be taken into account when valuing Nine for the upcoming float.
The February restructure effectively valued Nine at $2.3 billion, based on forecasts at that time of $250 million in EBITDA for the 2012-13 financial year, a multiple of 9.2 times earnings.
Nine is expecting EBITDA to rise to about $300 million this year, with $235 million to $240 million of this generated by its television business which will be boosted by the acquisitions of Nine Adelaide and Perth.
If the multiple from Nine's restructure was applied now, it would give the company an enterprise value of $2.7 billion. Reports suggest the valuation may be as high as $3 billion.
Arnhem Investment is the sort of institutional investor that Nine will be trying to entice to its share register and managing partner Neil Boyd-Clark says it will take a close look at the Nine prospectus.
"For us, the key issue is going to be the price," he says. "We form a view about what the advertising market is going to be like, what revenue share is realistic for Nine, and then it comes down to what price we are being asked to pay for the earning streams which flow from that."
There was never any secret about Nine's willingness for a quick relisting on the stock market. Its shareholder base reflects a mish mash of opportunists and parties that do not necessarily see themselves as long-term owners of an Australian television network.
The speed of the group's return to market reflects the fact that financial market conditions are as good as they will get and may not remain favourable next year.
"Consumer confidence is now at a 3½-year high after the federal election," says Morningstar Equity analyst Tim Montague-Jones.
"Historically, when consumer confidence goes up - and also we have low interest rates, equity markets going up and house values going up - you would expect that to flow through into higher advertising spend. And any rebound in advertising spend tends to hit television first."
Nine is not the only company looking to test the IPO waters while conditions remain favourable, and investors tire of low yields on bonds and deposits.
Dick Smith is readying for a return to the market and OzForex tested the waters with a listing earlier this month.
And despite the three commercial network bosses agreeing that conditions remain subdued, there has been improvement on this front.
"I do know that the [advertising] market has become a touch more optimistic versus where it has been over the last two years," Boyd-Clark says. "We're not talking anything spectacular, but certainly we've gone through a very tough period in terms of TV advertising and the pressure has just lifted a touch at the moment. They can probably make the case for better times ahead, and I think that's probably what's prompted the move," he says of the float.
How much of a potential pickup in ad markets Nine can price into its stock will be important for those selling, and those buying.
The television networks have high fixed cost bases, though these have been slashed in recent years. It means all three broadcasters will enjoy out-sized earnings from any uptick in ad revenues. An early float increases the likelihood that any of this upside will be enjoyed by new investors, although nothing is guaranteed.
"It's certainly not our base case today that we are going to see a major surge any time soon, but as you know, there is always the potential for the market to heat up if a number of things go right," Boyd-Clark says.
Allen is more sceptical on the issue of boom days returning for traditional media, which is facing a tangible digital threat.
"We don't think the good times are ever going to come back to the main media markets, in as much as we don't think you are going to see stabilisation of revenues, or growth, for all media types ever again," Allen says. "Every time the internet grows by 5 per cent, it takes a 1 per cent share, and that has got to come from someone."
In what may be an ominous sign for the broadcasters, Channel Ten chief executive Hamish McLennan said this week that Ten's previous younger target market was "in decline as a proportion of total TV viewing and total TV advertising, with fewer advertising dollars attached to it."
These are the viewers migrating to TV alternatives on the internet like direct downloads of popular US programs.
But no one is predicting a
digital savaging of the TV networks just yet.
"The structural migration will occur but it is hard to calculate the pace of change and at the moment television is still a very effective mechanism to advertise," Montague-Jones says. "If you want to portray a message to the mass audiences, TV is still effective."
Boyd-Clark says the threats have been there for a while and he doesn't discount the networks' ability to use the digital medium as an opportunity.
"If television has got content that people want to watch they will find a way of watching it in the most preferred fashion they would like. So we don't subscribe to the view that there is some new structural change emerging any time soon.
"There are obviously infrastructure threats, but they are not new and television so far has competed reasonably well".