THE DISTILLERY: Braking on Nine

Before we get into the issue du jour, a story involving the media (natch!), a good column this morning from The Australian's economics editor, Michael Stutchbury: "People usually don't whinge about getting a discount on what they buy, particularly when it comes with a big pay rise for the stuff they sell. But that's the wacky complaint that some in the Lucky Country are stirring up over cheap steel and other Chinese imports. And it extends to the idea that the supermarkets need to be forced to charge us more for locally produced milk. The Senate today begins an inquiry into the threat from cheap local milk. Australia has spent years trying to leave this protectionist past behind. Instead of crying over inexpensive steel or milk, Australians should worry that surging commodity prices, especially for food, are about to stoke an outbreak of global inflation. With that risk on the horizon, we should slap down anyone who whinges about people not charging us enough." A good column, a must read for anyone interested in the subject. But those special interests and politicians (especially National Party and the trade unions) will ignore the reality. It goes well with yesterday's offering from Ross Gittins, the Sydney Morning Herald's economics editor.
 
But onto the morning's focus, the sale of Nine Entertainment's stake in carsales.com.au by CVC, the private equity mob. The amount raised was a cool half a billion bucks, which naturally got our jotters opining as to the significance for the float of Nine in 2011. All I'll say is that it will make someone's bank manager a little happier. 
 
This morning, Fairfax's Ian Verrender wrote that there's a new angle on the Nine Entertainment float: "Those promoting this fable embarked on a sudden U-turn yesterday after Nine's owner, the private equity group CVC Asia Pacific, sold its half share in carsales.com, one of the gems in Nine, for $565 million. Don't get me wrong. A float has never been out of the question. It is just that CVC has to determine exactly how much of a loss it is prepared to take and for how long it wants to delay the inevitable pain. The story now goes that any cash raised from a partial float would be used to reduce debt to some kind of manageable level rather than provide an immediate exit for CVC. Even then, pushing that kind of float would be a hard slog for any stockbroker."
 
And The Australian's Geoff Elliott reckons there's the sound of slowing tills in the air at Nine: "In December, Nine told fund managers it was on track to strike operating earnings of about $550 million for the current financial year, but now, stripped of carsales.com's operating profit of about $40 million, it is believed forecasts are in a range of $480 million to $500 million. The weaker number, even accounting for carsales.com's profit being pulled out of the business, reflects the fact that media companies have hit something of an airpocket in the past few months after a roaring run last year. That means a lower than expected valuation on any sharemarket listing of Nine Entertainment, which until yesterday housed the carsales.com unit."
 
News Ltd's Terry McCrann said this morning: "The $550 million or so CVC pockets from selling its 49 per cent stake in Carsales is in a sense pure profit – to be set against how much CVC will lose when it eventually sells out of Nine by floating it to the market. CVC is walking something of a tightrope between having to wait for the Seven-WA Newspapers merger to be bedded down – events at Ten don't exactly help; and the possibility of the whole market going over a cliff."
 
Julian Lee wrote on smh.com.au yesterday: "You know what they say about birds in the hand compared to those in the bush. Nine Entertainment's decision to offload its 49 per cent stake in carsales.com raises the question of whether its owners are cashing in now rather than going for a float. As one of Nine's growing businesses wouldn't it make sense to keep one of the jewels rather than sell it off, thereby lessening the value of the whole? At its interim results Carsales posted profits of $27.7 million off the back of a strong rise in revenues. Today's $575 million placement of its Carsales shares suggests that Nine and its private equity partners CVC Asia Pacific are considering cashing in now rather than waiting for a float that may never happen."
 
Stephen Bartholomeusz wrote on Business Spectator: "The infusion of cash from the sale will enable CVC to reduce the leverage in Nine, which has something approaching $4 billion of debt. With its major debt facilities not maturing until early 2013, however, that wasn't the motivation for the sale and there is no immediate pressure on CVC to re-finance or float the group. The sale would, however, make an eventual re-financing easier, whether in the lead-up to the float or as part of a "re-finance and hold" decision. Whether Nine is brought back to the market this year is more dependent on the state of the equity and advertising markets than its existing capital structure. Advertising markets have rebounded and the two bigger free-to-air networks' digital channel strategies have, so far, been surprisingly successful."
 
And The Australian's Tim Boreham wondered about staying in a stock when private equity is leaving: "Parties more cynical than your wide-eyed columnist have suggested that when private equity exits, it's time to head for the door as well. But what's if there's a decent excuse? That's the dilemma for investors in the online car ads portal after ACP Magazines (an arm of Nine Entertainment) confirmed it would sell its 49.1 per cent stake to institutional investors at $4.92 a share, a 6 per cent discount to the prevailing $5.24 a share. Rather than being a case of selling at the peak of performance, the Nine sale looks more a case of the need for owner CVC to lighten its debt burden ahead of a planned float of Channel Nine." Remember Myer's performance after TPG sold and fled the scene. Myer's shares have never been at the $4.10 issue price.
 
The Australian's Nabila Ahmed said: "The timing of Nine Entertainment's $5 billion initial public offering is yet to be decided, after the company's private equity owner, CVC Asia Pacific, sold its 49.1 per cent stake in carsales.com at $4.92 a share in a $565 million deal today. The sale, which will help reduce Nine's debt, is an indication CVC is not in a hurry to rush to market with Nine, preferring instead to take a good price on the carsales.com investment. Strong first-half results from automotive advertising website carsales.com, combined with solid share price performance, prompted CVC to sell the stock. Shares in the company had risen about 50 per cent since the company's listing in September 2009." What wasn't explained was why sell the Carsales stake at all if it gave the Nine Entertainment Co a bit of investment pizzazz.
 
Elsewhere, the AFR's Chanticleer columnist wondered this morning: "Shareholders in the $1.2 billion Kingsgate Consolidated, one of the country's biggest gold miners, must be intrigued as to why their company's good name and its resources were used so heavily to help another company get its hands on a $2.6 billion gold resource in Papua New Guinea."
 
Malcolm Maiden says the game is almost over for AMP, with AXA APH within its grasp and the merger to happen: "AMP inevitably will cop ''AXA merger chaos'' headlines when the inevitable adviser defections occur as the merger is bedded down. It will emerge with about 20 per cent of Australia's wealth management distribution capacity, and AMP advisers deliver relatively high sales per head, about 12 per cent better than the industry average. AXA's figure has been about 10 per cent below the industry average over the same period, so Dunn will lock in substantial revenue and profit gains if he brings AXA's advisers up to speed."

And The Australian's John Durie remains unimpressed with the federal government's proposed changes to competition laws: "If the federal government wants to increase competition in the banking industry, banning so-called price signalling would rank way down the list of effective remedies. By month's end the draft reforms will be finally released. Treasurer Wayne Swan still has to extend the law to other sectors, but as things stand now he thinks there is no case to extend the rules past the banking sector. This puts Swan in direct conflict with ACCC boss Graeme Samuel, who is more concerned with his perceived impotence to deal with cartel abuse in the petrol industry and in any case told the Senate Banking Committee the concept of industry specific legislation is highly undesirable. The only good news from the details available to date is the laws will be basically unworkable, a potential major nuisance for all concerned." A Canberra special!