Telstra's whole Nine yards?

Telstra appears to be kicking the tyres on a major entry to the mainstream media sector. While the motivation is obvious, the opportunities are scarce and difficult.

There are reports that Telstra has abandoned its undoubted interest in acquiring James Packer's Consolidated Media Holdings but is toying with the idea of acquiring the debt-laden Nine Entertainment business from its private equity owner, CVC Asia Pacific.

There is no doubt that Telstra was keenly interested in Cons Media, which has a 25 per cent interest in Foxtel and a half interest, alongside News Corporation, in the lucrative Fox Sports joint venture.
Indeed Telstra's chief executive, David Thodey, was quite open earlier this year in saying that if Cons Media were up for sale he was interested in buying it.

He also, however, acknowledged that after the tortuous path the Foxtel/Austar merger took to obtain regulatory approval for their merger, a purchase would face major regulatory obstacles given Telstra's existing 50 per cent interest in Foxtel and the Australian Competition and Consumer Commission's stated concerns about any significant expansion of Telstra's interest in Foxtel in particular and content businesses in general.

Because of the competition policy sensitivities, which have more to do with the ACCC's concerns about competition in the telecommunications sector and the use of content to entrench Telstra's dominance in a post-national broadband network environment than with the media sector, it was always difficult to see Telstra emerging with the Cons Media assets.

Those assets are available, with Packer looking to extract close to $1 billion for them in order to fund his attempt to grab effective control of the Echo Entertainment group and its Sydney and Queensland casinos without diluting his control of Crown Ltd.

The front-runner for those assets, however, has always been News Corp, which has matching interests in Foxtel and Fox Sports to Cons Media's, as well as management control of Foxtel. If it acquires the Cons Media interests it would turn Foxtel into a straightforward joint venture with Telstra and give News 100 per cent of Fox Sports.

If it has accepted the near-impossibility of getting its hands on more of Foxtel and a stake in Fox Sports there isn't much else of consequence in conventional media that would be of interest to Telstra other than Nine.

Nine is being shopped around by CVC because, with a massive chunk of senior debt maturing in February next year, unless it can find a buyer for the business it is likely Nine will fall into the hands of a group of hedge funds that have hoovered up more than $1 billion of its $2.8 billion of senior debt.

What Telstra could do with a free-to-air television network isn't obvious, although previous regimes have considered acquiring Nine in the past and presumably there is an understanding within Telstra of how a network might complement its telecommunications business.

Certainly bringing a free-to-air network next to Foxtel would create some interesting possibilities, particularly the ability to "manage" sports programming that is on the federal government's anti-siphoning list. There is little doubt, however, that an attempt to acquire Nine would face intense scrutiny from the ACCC.

Thodey, at an investor briefing earlier this year, confirmed it is moving towards having substantial excess cash after locking in the group's $11 billion deal with NBN Co and the government – between $500 million and $1 billion this year and then another $1 billion in each of its next two financial years.

That's not enough for a meaningful capital management program but it does constitute a meaningful war chest for acquisitions to offset the gradual loss of revenue and earnings as its high-margin copper network is progressively decommissioned.

The challenge for Telstra is to find value-accretive and strategically sensible ways to deploy it in a market not exactly awash with easy or compelling opportunities. It is clearly searching hard for assets that would create a new, significant and complementary dimension to its portfolio. The tough part will be finding something – anything – that fits the bill that the ACCC will allow it to acquire.