Over the past few days the Smartest Guys In The Room have been arguing, at times loudly, voices no doubt cracking, about whether they have lost $2.8 billion or $2.6 billion on a $5 billion investment that was made six years ago.
CVC Asia Pacific, the private equity investor who led the acquisition in 2006, has lost all of its $1.9 billion. A group of others who put roughly $1 billion into second tier, or mezzanine debt, through Goldman Sachs have been trying to salvage $300 million of that as equity in Nine. They’ve been offered $100 million worth of equity and will almost certainly take it when the meetings conclude today.
The so-called vulture hedge funds that bought the senior debt from the banks, led by Oaktree Capital Group and Apollo Global Management, will convert much of their loans into equity and thus give the company a fresh start under new ownership. In effect, it’s a takeover.
So if all goes well, Nine should avoid going under today, along with all the bad things that usually involves, such as value leaking out to the receivers, who always get paid first, and management wandering off to businesses that aren’t run by bean counters, such as Seven Network for example.
How did they all get it so wrong? Well, interestingly they can’t blame Nine for performing badly, or even complain that Australian television has been a disaster.
Since 2007 Nine has increased its audience share from 26.9 per cent to 27.8 per cent, and has recently regained the lead from Seven in the key 25-54 demographic.
Television’s share of total advertising spend, meanwhile, has remained above 50 per cent over the past five years. The share going to digital advertising, both display and search, has gone from 6 per cent to 14 per cent, but most of that increase has come out of newspapers, with a bit from radio and magazines.
The greatest loss of value in Nine Entertainment has been from the magazines division, ACP. In 2006, CVC paid 11.5 times earnings for the company. At that time, ACP was making more than $200 million; if the multiple is applied uniformly across the business, that means it was then valued at more than $2.3 billion.
Three weeks ago, ACP was sold to Bauer of Germany for $525 million, which means $1.8 million was lost on the magazines.
So while close to $3 billion, or about 60 per cent, has been lost from the value of Nine Network in the past six years, three times that, or about $9 billion from a value of $10 billion, has been lost from Fairfax Media. The difference is that Fairfax, happily, doesn’t have more than $2 billion in debts due to be paid in February, unlike Nine, although it does have $1.2 billion in debt on its books.
Nine’s investors, and Fairfax’s for that matter, simply paid too much in 2006 for a business that wasn’t going anywhere, in a world that was about to change dramatically for the worse.
If the board and management, led by chairman Peter Bush and CEO David Gyngell, can pull off a smooth ownership transition from CVC Asia Pacific to the senior lenders, with a small chunk of equity going to the Goldman Sachs clients, it will be a great result for them and the business.
It should be another fresh start for Nine after Gyngell replaced Eddie McGuire as CEO in October 2007, just before the world went pear-shaped, and the deal should see the management team get access to some equity that might actually be worth something this time.
Kerry Stokes at Seven and Lachlan Murdoch at Ten will not be happy to see a newly motivated and re-invigorated David Gyngell with the carrot of an equity-based long term incentive plan at Nine.
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