Village may tune in to a private future

THERE may well be a little more to Village Roadshow's search for someone to buy its $400 million controlling stake in the Austereo radio group than it almost losing Hamish and Andy in August.

If the trade sale of Village's 52 per cent stake in Austereo succeeds, it may help bankroll Village's controlling Kirby brothers, Robert and John, along with their "adopted brother" and managing director Graham Burke in privatising their entertainment company.

Village's stake in Austereo, home to the national Today and Triple M networks as well as the loveable Kyle Sandilands, has been a handy saleable asset in Village's back pocket for some time.

Village took over the original Austereo, which owned Melbourne's Fox and Sydney's 2Day stations, and merged it with its Triple M business in the mid-1990s, before relisting it on the ASX a decade ago. Village has sold some of its holding occasionally, but always retained control.

The reasons are commercial and personal the Kirbys and Burke are fans of both the radio business and Austereo's long-serving executive chairman, Peter Harvie (who also sits on the Village board).

They are not such big fans of the public scrutiny that comes with being listed on the ASX, particularly when your business is vastly more complex than just selling cinema and theme park tickets or retaining radio celebrities. As a co-producer of a suite of Hollywood films, Village is involved in some of the most Byzantine financing and profit-share arrangements imaginable.

Making movies is not just costly it is seriously risky. Each film is a punt worth tens of millions, sometimes hundreds, that the public will watch it not just once, but several times or at least buy the DVD and spinoff merchandise.

Village keeps most of that circus off its balance sheet, but still has exposure. Add to that the continual cost of maintaining and enlarging its global cinemas and theme parks (Movie World, Sea World, etc) operations, and it is easy to see why the group is carrying a total debt burden of more than $1 billion and why the sharemarket value of Village is still less than $400 million, even after a 7 per cent share price jump yesterday.

For the past three years, the Kirbys and Burke (who is an equal partner in their combined 51 per cent shareholding) have rotated the moving parts of Village like a kid trying to solve Rubik's cube to get the right combination to privatise the company without beggaring themselves.

The last attempt, in 2009, died almost before it began and the company opted instead for a share buyback. Advisory group Grant Samuel valued the shares back then at between $3.69 and $5.30 each compared with yesterday's $2.68 close. At that time it valued the Austereo holding at $310 million to $350 million.

In the final months of 2010, Village accelerated the "tidy-up" of its structure, converting its vexed preference shares to ordinary stock and, a week before Christmas, announcing the $115 million sale of Sydney Attractions which owns the Sydney Aquarium and Hamilton Island Wildlife Park, among other assets.

ANZ's mergers and acquisitions team advised Village on that deal and is believed to be helping walk Austereo past a handful of potential buyers. Ten Network has been singled out as a logical acquirer, although Lachlan Murdoch's shared stake in the TV network would cause problems because he also controls a rival radio network. Fairfax Media (owner of The Age) has also been mentioned, partly because former Austereo executive Michael Anderson sits on the board, although the radio format is vastly different to its existing news stations.

Insiders say that the Kirbys want a business focused on operations with the highest return on investment and cinemas and theme parks beat radio in that regard.

A "smaller" Village, with less debt, is also attractive if they want to buy out minority shareholders.

Most of the money from the Sydney Attractions sale has gone to debt reduction, and the loss of earnings from that arm will be washed out by the reduction in interest payments on debt.

If Village can sell Austereo for more than $400 million, and the stake appears worth that based on the radio group's earnings and the fact that the buyer will gain control, the proceeds will be equivalent to between $2 and $3 for each Village share although, as Grant Samuel pointed out in 2009, there is a capital gains tax liability that would chew up north of $100 million unless Village has sufficient capital losses as an offset.

If Village can keep a net $300 million, send half of it to the banks and the rest to shareholders as a capital return, the numbers start to move in favour of the Kirbys/Burke for privatisation. They would receive around $75 million to $100 million as a "grubstake" as collateral for the cash they will need to borrow to buy the rest of the business.

But will it be this year's blockbuster deal for minority shareholders?