Ten restructures, and then there was Nine

Ten Network’s trading halt today signals that it is on the verge of completing a major balance sheet restructuring that will secure it against the risk of a further deterioration in an already difficult advertising market. With Seven West Media having completed its $440 million capital raising this week, that leaves Nine Entertainment as the last of the networks yet to reconstruct its finances.

Ten, which raised $200 million through an equity issue last month, asked for the trading halt "pending an announcement by Ten in relation to the sale of Eye Corp". Ten has been in exclusive and protracted negotiations with oOH!media, owned by CHAMP Private Equity, over the sale of its own outdoor advertising business.

Originally Ten planned to use the proceeds from the Eye Corp sale to repay a $US125 million facility that matures next March but opted for the capital raising as insurance against a breakdown in the negotiations.

Removing the pressure on its balance sheet and earnings of its mounting debt levels also wouldn’t have harmed its negotiating position with CHAMP. Ten originally hoped to get something approaching $150 million for Eye Corp.

Assuming the sale has been agreed, Ten would have reduced its debt levels from their pre-raising peak of $484 million to around $150 million, giving it far more flexibility to respond to any further downturn in the advertising market while trying to rebuild its programming schedule. Ten has made it clear that it has embarked on a turnaround that could take several years and which will involve higher programming costs.

Seven West Media has also been affected by the sector-wide slump in revenue, although it has held up relatively well in the conditions. New chief executive Don Voelte, however, wasted no time in addressing the market’s concerns about Seven West’s leverage and its raising, too, removes that as an issue.

Nine Network has made a significant comeback this year, helped by the extraordinary success of The Voice and the halo effect it generated for the Nine schedule, although its magazine business has felt the pressure of the advertising recession.

The issue for Nine, however, isn’t so much its earnings, which are down relatively modestly given the conditions, but the debt it is carrying as a result of its buyout by private equity firm CVC Asia Pacific just ahead of the financial crisis. It has $2.8 billion of senior debt maturing in February and a further near-$1 billion of mezzanine debt due a year later.

The ingredients for its restructuring are starting to line up. Nearly 60 per cent of the senior debt is now held by hedge funds and distressed debt funds that acquired their exposures at less than face value – prices ranging from 70 cents to 90 cents in the dollar. Two funds – Oaktree Capital and Apollo Global Management – own about $1 billion of that debt.

Today The Australian Financial Review reported that giant private equity group TPG has teamed up with US media entrepreneur Harry Sloan to attempt a buyout of Nine.

TPG has experience of working with hedge funds and distressed debt specialists to reconstruct over-leveraged businesses. It headed the successful 2010 buy-out of Alinta, which involved 40 funds which had acquired a majority of that group’s debt (among them Oaktree).

In the Alinta reconstruction, and a similar debt-for-equity swap which restructured the Centro group, the key to the transaction was that because the funds had bought the debt at discounts to par there was an ability to recapitalise those entities and effect a debt-for-equity swap on sensible terms that were still attractive, and profitable, for the funds.

The fact that Nine is performing well at an operational level, in the industry’s circumstances, ought to make a reconstruction possible, although CVC will inevitably have to take a massive haircut on the $1.9 billion of equity it has sunk into Nine and indeed might ultimately have to write off the entire amount.

CVC will be keen to engage with TPG and Sloan, and any other party it can attract, to provide some counter and tension to its dealing with the hedge funds, who otherwise would gain increasing leverage in their attempt to gain control of Nine as the window ahead of that 13 February deadline shrinks.