Ten's thrifty balancing act

For the second time this week an Australian company has adopted a safety first approach to shoring up their balance sheet. Ten Network's balance sheet probably needed to be shored up more urgently than Brambles'.

Both companies are in broadly analogous situations.

Brambles decided to raise $448 million of new equity on Monday after failing to attract a satisfactory price for its Recall information management division. The sale of Recall, for around $2 billion, was supposed to generate the cash to pay down some of the debt Brambles took on last year when it bought the IFCO Systems pallet and logistics business for $1.3 billion.

Ten has been engaged in a protracted process to sell its outdoor advertising business, EYE Corp. Last month it entered an exclusivity agreement with a business owned by the CHAMPS private equity group, which it said today is in the advanced stages of a due diligence process. With only one bidder remaining, however, there is no certainty that a sale will occur at a price acceptable to Ten, which had hoped to get up to $150 million for the business.

Where Brambles and Ten differ is that Brambles is a strongly-performing business, with more than $1 billion of earnings. Ten is in the midst of a major restructuring and repositioning under its new chief executive, James Warburton and is under-performing within a sector that is being buffeted by the tough conditions for advertisers exposed to the highly defensive behaviour of consumers.

When it announced its half-year results in April, Ten revealed an 11.3 per cent fall in its core television revenues and a 40.2 per cent slump in its earnings before interest and tax, despite making good progress on reducing its cost base as part of a program that aims to pull $30 million a year of costs out of the business.

Today, in announcing a $200 million underwritten equity raising, Ten said television revenues were down 12 per cent in the March quarter and the same amount for the nine months to May – its performance has deteriorated further.

Ten is the weakest performer in a weak sector and there's nothing much that Warburton, who wasn't able to take up the CEO role until January after legal action by his former employer, Seven Group, forced him into an extended gardening leave, can do about it this financial year.

While Ten has tinkered with its schedule, with some success, it needs a suite of new and better programs. Ten said today that, while it remains on track to cut five per cent, or $30 million, from its television cost base this year, television costs were expected to increase by mid-to-high single digits next financial year primarily because of the increased investment in programming.

It also needs to pay down its debt. Net debt has blown out from $403 million in February to $484 million and the interest costs have been absorbing an increasing share of its reducing earnings. It has a $US125 million facility due for repayment next March which a sale of EYE Corp would address, but relying on that would entail some risk and force Ten into the position of having to sell under duress.

Given the degree of uncertainty and risk within the general external environment, the weakness in its own performance within a sector where revenue is soft and unpredictable and the need to both meet its debt repayment commitments and fund its programming requirements for next year, the prudent option was to raise equity.

It helps to have a couple of billionaires on the register. Gina Rinehart, James Packer, Bruce Gordon and Lachlan Murdoch, who between them own 43 per cent of Ten, have committed to taking up their entitlements.

With Ten describing the 2012-13 financial year as one of transition towards a more sustainable business, there is clearly no expectation of a quick turnaround in the network's fortunes. Rebuilding its schedule and its ratings and revenue base is going to take several years, clever programming strategies and probably a little luck before Ten can be stabilised.

Given its own circumstances, the general environment, the time horizons involved in achieving operational stability and the overall level of operational risk in media businesses generally, lowering the financial risk within the group is a very sensible decision. If it happens to sell EYE Corp at an acceptable price, that would provide even more insurance and capacity to rebuild its schedule.