THE DISTILLERY: The Seventh circle

This column has seen a sign. A phantom glow that first appeared in the shape of a computer screen but soon resolved into a luminous visage: drawn and aging, yet balefully hale. It was Kerry Stokes, demigod of Australian media. It screamed.

Accompanying the apparition came a chant. At first low and slow but rising to a frenzy. Small figures danced around the face, wheeling and writhing, repeating a one word incantation as if summoning Beelzebub himself. The word was Seven.

Today, seven columnists assess Seven Network Ltd and its plan to buy WesTrac, Kerry Stokes' personal business which includes a Caterpillar franchise in WA, NSW and ACT. WesTrac, you will have noted, has seven letters – 777! If that's not a sign, then this column's never seen one.

The first of our cavorting acolytes is Elizabeth Knight of The Sydney Morning Herald who howls as she dances: "If Kerry Stokes manages to pull off the marriage of his equipment services group, WesTrac, with his media investment company, Seven Network Ltd, the merged entity will have sufficient cash and cash flow to engage in a serious shopping spree. For my money, at the top of the list will be the James Packer-controlled Consolidated Media Holdings, which houses 25 per cent of the pay TV company Foxtel and 50 per cent of pay TV program provider, Premier TV.”

Alas, even as her cries fade, Knight stumbles too close to the burning face. As she teeters, the dark, feathered figure of The Australian's John Durie flicks away her balance as he whispers: "Packer has no plans to sell out of the company in which he controls some 45.3 per cent and, through coming share buybacks, will move to more than 50 per cent. At that point he won't really care about the standstill deal with Stokes, but, then, in Stokes' mind, the longer he hangs around the more chance he has of winning the prize.” Knight gives a final cry and is gone.

Three other figures dash in. The first is Alan Jury of The Australian Financial Review, who babbles in tongues at the giant face: "It's easy to automatically dismiss the radical plan to merge the public and private interests of Kerry Stokes. After all, when one has a wholly owned subsidiary that owes $1 billion and has $1 billion cash sitting in the bank account of a different 48.8 per cent owned listed entity, what's one expected to do? ... That it combines the growth profile of an industrial equipment company whose customers are largely in the earthmoving, mining and infrastructure space with the more defensive characteristics of a traditional media company and some nascent new media opportunities in broadband and telecommunications is a happy coincidence.”

The next is Stephen Bartholomeusz of Business Spectator, visible only in silhouette, his utterances barely discernible above the diabolical din. "The $1 billion of net cash remaining [in Seven Ltd] from the KKR deal is trapped. An attempt to return it to shareholders would crystallise a $600 million-plus deferred tax liability. The obvious option for using that cash efficiently and in a fashion that creates the capacity to pay franked dividends is to use it to acquire an operating business.”

Ian Verrender of The Sydney Morning Herald is the final agonised soul. He bawls that "...WesTrac is heavily exposed to China which, if the conventional wisdom is correct, will continue its long march to economic dominance this decade. But it is not without risk, either political or economic. Then there is the risk with the Caterpillar franchise. A fairly loose arrangement, the franchise can be terminated by either party within 90 days simply by writing a letter. Given Stokes has been Caterpillar's star performer for years, that is an unlikely scenario. But it is a possibility. In fact, Stokes won control of the franchise after Caterpillar ordered Alan Bond's Bell Resources to sell because it considered Bond unsuitable for the role. Should they vote in favour of this deal, minority shareholders will be very much in the minority. But there is little doubt the exposure to China's potentially enormous economic growth is an alluring prospect.”

Ahhhhh...a low groan bleeds from the shadows, where two figures wave and swoon, moaning of the minority shareholders...

The first of the figures, Bryan Frith of The Australian, steps forward, fingers fiendishly work a stone abacus: "...if Kerry Stokes was not the common factor it's a fair bet to say Seven Network and WesTrac Holdings would not be proposing a merger of two such disparate companies...that would bring with it no operational synergies...putting its media interests into a joint venture and the acquisition of holdings in other listed media groups, meant Seven had changed from operating media businesses into an investment holding company, and the market commonly prices investment companies at a discount to net tangible asset...WesTrac is forecasting EBITDA of $231m in 2011 and EBIT of $192m...On that basis, the terms imply a blended multiple for WesTrac of 7.8 times the 2011 EBITDA and 9.4 times the forecast EBIT.”

A terrible scream rends the night and an accusing finger emerges from the gloom over Frith's shoulder. It is pointed straight at the face and quivers with fury. Adele Ferguson of The Age steps into the light, shrieking "...the proposal...will leave Stokes debt free and lift his stake in the new Seven Group from 48 per cent to 68 per cent. What makes the deal even more interesting is that it gives Seven Network an implied valuation of $8.70 a share, which is well above the market price, but below the company's net tangible assets of $10.18 a share, according to the latest set of accounts filed yesterday morning. Even if the company's latest tax liability is thrown into the mix, the deal is still pitched below net tangible assets...The general consensus is that the proposal is acquisition by stealth. Stokes has spent the past few years building his stake in Seven from 30 per cent to 48 per cent, at little or no cost. The board has allowed him to do this by issuing share buybacks that he has not participated in...The deal yesterday, which transfers $1 billion of debt attached to WesTrac into Seven, not only lifts his stake in the newly created Seven Group to 68 per cent but Seven will use some of its cash to reduce the WesTrac debt...The endgame could be a few more share buybacks – without Stokes' participation – to get him up to 90 per cent compulsory acquisition, and then it is good night to the publicly listed Seven Group and hello to Stokes' private empire.”

Hopefully, this column concludes, as it dashes cold water into its face. If such a point were reached, Stokes significance as a figure of public discussion will diminish greatly. So passes another day in the occult world of Australian commentary.