Voelte readies Seven for a Nine assault

Seven West's capital raising will assuage worries in the market about its debt levels and position the media company for a stronger attack on its vulnerable opponent Nine.

Don Voelte hasn’t wasted any time at all in responding to the market’s concerns about Seven West’s debt levels.

Ever since it was created last year through the merger of Seven Network and West Australian Newspapers the market – and Seven West’s share price – have been unsettled by the group’s $1.85 billion of net debt during a period of deteriorating advertising markets and media profitability.

That’s despite the fact that, as Seven West has said consistently (it reiterated it today) the group is trading respectably in the circumstances and is well within its banking covenants.

After an earnings downgrade in April that shocked the market and triggered a plunge in the Seven West share price, however, there is a solid rationale for raking out some insurance against further deterioration in the environment by deleveraging the group.

The April downgrade was from a market expectation of around $500 million of earnings before interest and tax (EBIT) to a range of $460 million to $470 million. Today Seven West said it now expects EBIT to be about $473 million, slightly above that range, so there hasn’t been a further fall in earnings to force its hand on a capital raising.

Nevertheless, conditions remain difficult and hard to read and Nine Network is now challenging Seven’s ratings dominance and therefore the revenue premium that comes from being the leading network, and the Olympics are yet to come. The $440 million capital raising is a sensible precaution.

Voelte, the former Woodside chief executive who was a shock appointment to the Seven West post last month, appears to have a brief to focus initially on reducing the group’s costs and risks.

The capital raising – an underwritten pro-rata renounceable issue of one share for every two held – will do both. It will reduce Seven West’s leverage ratio (net debt to earnings before interest, tax, depreciation and amortisation) to 2.7 times and, because Seven West’s existing borrowing facility has an interest rate margin driven by its leverage ratio, cut its interest costs in the process.

It appears the capital raising may have been decided upon very recently.

While both Seven West’s major shareholders, Kerry Stokes’ Seven Group (33.2 per cent) and Kohlberg Kravis Roberts (11.8 per cent) will take up their full entitlements, KKR has told Seven West it may not be in a position to participate in the institutional tranche of the offer. If that is the case, it will be allowed to take part in the retail entitlement offer. That suggests it had no real warning that the issue was about to be announced.

The issue could be expected to be greeted warmly by the market, given that Seven West is regarded as the best-performing of the local media businesses at an operational level and that the market’s main concern was its debt levels.

Given that struggling Seven West rival Ten Network was also recapitalised recently, via a $200 million equity raising, Seven West’s issue leaves only Nine Entertainment group’s balance sheet awaiting a fix.

The private equity-owned Nine is impossibly over-leveraged and facing a February 2013 deadline for repayment of its $2.8 billion of senior debt. With hedge funds owning more than half that debt and agitating for a debt-for-equity swap it is probable that, one way or another, Nine will be recapitalised at some point before the end of this year.

Seven West’s issue might well create some pressure for Nine’s predicament to be resolved sooner rather than later, given that the ratings-critical rights to rugby league broadcasts are up for grabs.

Those rights are expected to bring the Australian Rugby League Commission about $1 billion of revenue over the next five years and Seven West is expected to try to wrestle them off Nine, or at least force their price up.

The capital raising gives Seven West a lot of potential firepower and flexibility to continue to attack Nine while it remains vulnerable.

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