Suffering shareholders in the Ten Network (TEN) are between a rock and a very, very hard place.
When they meet in Sydney next month on December 18, they know they only have one option and that will be to approve a related party transaction involving that $200 million loan from the Commonwealth Bank.
The market knows Ten’s problems and the fact there are no easy options left, and that the CBA loan and the potential dilution attached to the deal, is the only deal left.
Ten shares peaked at more than 33c in September. Yesterday they ended at $26c, 2c above the love of 24c – that’s why Ten’s shares are trading around 25 to 26 cents at the moment.
Ten’s shares were around 26 to 27 cents at the start of July – the wider market is up 11.5% in the same time, which tells us just how unattractive Ten is to investors, except day traders looking for a quick turn over a day or two.
Ten shares were around 42c at the time of the 2012 AGM in Sydney – that’s 16c or 38% higher than the close yesterday, surely a telling judgement on the way investors currently value Ten.
And, complicating matters for existing Ten shareholders is the fund raising and float currently being conducted by the Nine Entertainment Co, owners of the Nine Network.
When it lists, it will mean there are three main free to air metro TV operators to choose from, as well as Ten’s regional affiliate, Southern Cross Austero, and Prime, Seven’s regional affiliate.
That also means Ten goes to the bottom of the pile insofar as attractive media investments go. It’s the weak stock of the bunch – by a long way.
New programs, no change as the Ten Network continues to suffer from a shortage of ratings, a shortage of TV revenues and a shortage of cash.
The Nine IPO has also helped narrow the options for Ten’s latest fund raising – shareholders would find it hard to justify throwing more money into Ten after two fund raisings in 2012.
With the Nine float on the horizon, why buy Ten when you can buy Nine, with the chance of some share price growth in the short term?
But Nine and Seven aren’t in the same boat as Ten. Both dominate the Free To Air TV industry with high ratings and the lion’s share of ad revenues.
But even both of these companies have found it tough in the past year with minimal revenue growth meaning cost controls have been the dominant business model, as it was in 2011, 2010 and back through the GFC.
In Ten’s case it is suffering from a shortage of ratings, a shortage of TV revenues and a shortage of cash.
In effect, Ten is now stuck with a last resort bank loan from the Commonwealth that is both generous, and tight.
The independent experts report contained in the Notice of Meeting reveals quite clearly that non-guaranteeing shareholders will have no option but to approve the loan and the associated related party transaction – they can’t get the same amount of money from any other source on the same generous terms.
And seeing Gina Rinehart supports it (and probably so will the Seven Network, which holds 2.4% of Ten), the deal will get up.
And Ten will get an unusual four year $200 million loan which the experts report describes as effectively "a line of credit".
The loan needs shareholder approval because three of the big shareholders – Lachlan Murdoch, James Packer and Bruce Gordon, are having to guarantee the loan for the Commonwealth – and in exchange for that guarantee they will receive cash or shares to the value of around $20 million – making it a related party transaction and needing approval at the AGM.
The experts make it clear that Ten is what the Americans call a ‘junk bond issuer’ in that it is a high risk borrower (in the lower B level of ratings for Standard & Poor’s and Moody’s) and that if it tried to access high yield bond markets here or offshore, the interest cost would be high, and the benefits to Ten would not be so generous.
The Commonwealth has been a long time supporter of Rupert Murdoch and his family and companies over the past 40 years or more, so it is natural that the CBA would be the first port of call for Lachlan Murdoch and Ten at a time when it needs money to try and get through the next couple of years in a final attempt to survive in its present form.
Ten has already wasted the best part of $500 million in the past year or so on poor programs, restructuring costs, repaying debt and paying for new programming.
But given Ten’s loss making and recent history of poor management and ratings – there’s no prospect that Ten will improve quickly, it needs a lot of money. And the CBA has come to the party with a loan whose terms range from the charitable, to downright tough.
The charitable extends to the fact there are no covenants or restrictions on Ten. Normal corporate loans insist on those borrowing the money maintain a mixture of interest and debt cover to cashflow, profits etc.
Only the biggest, wealthiest companies can extract generous terms from their banks – or those like Ten, where there is a long standing personal relationship, or where three billionaires guarantee the loan.
That’s why Ten was able to negotiate a generous repayment scheme whereby interest doesn’t have to be paid during the four year term of the loan – it can be capitalised and repaid when the four years are up.
That limits Ten’s cash outflow and allows it to use as much of the $200 million on new programming and development. Imagine trying to get a loan like that from your bank for your next house purchase, or small business expansion loan.
But while the CBA is accommodating on one hand, on the other they are hard-nosed in the shape of an almost usurious security provision.
The expert’s report reveals that the CBA wants "Security from Ten and its wholly owned subsidiaries comprising at least 90% of Ten group’s EBITDA and total assets." – Ten has more than $1.3 billion in total assets, and to secure that, the CBA wants to put its foot on around $1.18 billion.
That’s a very tough provision to secure a $200 million loan (or between $250 and $300 million if the capitalised interest isn’t repaid).
That over securitised loan tells us a lot about the CBA’s real opinion of the financial health of the Network Ten. The CBA sees Ten as a huge credit risk, even with the guarantees from the trio of billionaires.
If Ten fails to repay the loan, the CBA would be entitled to more than $1.18 billion of Ten’s assets, leaving as little as $130 million to cover all other creditors. But there’s a hitch (and a reason perhaps for the CBA’s high level of security).
If Ten can’t repay the loan and the CBA is forced to call on its security against 90% of the assets, then much of that figure evaporates because it includes more than $780 million of intangibles, such as goodwill and the value of the broadcasting licences. That $780 million falls sharply in the event of a collapse because there is no goodwill in a wreck.
Small shareholders face potential dilution if the loan is approved and these minorities, plus Ten’s small creditors and TV production clients are now on the outer as the CBA will put its huge foot on a huge whack of the network’s assets to reassure itself.
Small shareholders face further dilution because the three guaranteeing shareholders – Lachlan Murdoch, James Packer, and Bruce Gordon – will split $20 million in fees for guaranteeing the $200 million debt facility with CBA and can take their fees in shares, instead of cash.
The report also reveals that Lachie Murdoch and James Packer have to vote their near 18% stake in Ten as one because they are considered to be related parties. Lachlan Murdoch bought his 8.94% stake in Ten from James Packer and holds it in his key private company, Ilyria.
"llyria is an entity controlled by Ten’s chairman, Lachlan Murdoch, and has a direct holding of 8.94% of the ordinary shares in Ten. Illyria is an associate of CPH by reason of an agreement entered into between them on 23 November 2010, under which they proposed to act in concert in relation to the exercise of votes attached to their shares and to agree customary pre-emptive rights. CPH also has a direct holding of 8.94%."
The association between CPH and Illyria renders each of them substantial holders of 17.88%. Mr Murdoch can’t buy more shares and breach the 20% limit without dragging Mr Packer into any potential breach.
Birketu Pty Limited holds the Ten stake of WIN Corp owner (the regional affiliate of Nine) by Bruce Gordon and has a substantial holding of 14.89% in Ten, which has increased from earlier in the year when it held 14.3%. Gordon can’t go above 15% without breaching the 75% reach rule which restricts the audience of TV groups.
This week it was reported that Ten management has again started cutting costs, looking for a 10% reduction. That could see just over $50 million cut. Ten had costs of $546 million in the year to August 31 (and EBITDA of just $46 million).
The fact that the third round of cost cutting is happening in as many years tells us just how dire Ten’s outlook for 2014 is, and how desperate it is for the $200 million from the CBA.
Nine was in a similar place to Ten only a year ago – it almost collapsed but for an agreement among hedge funds debt holders which helped recapitalise the company and set it on the road to the looming float.
Is Ten then in a similar position? Nope. If Ten is to recover, it will be a drawn out affair – at least a year or more. And in the meantime Nine and Seven West Media, owned by kerry Stokes, will make life as tough as possible.
It already has had two strategies in 2011 and 2012. Now it’s on its third, targeting viewers in the 25 to 54 age group – where Nine and especially Seven are already very strong competitors with a big roster of popular programming.
Both Ten and Nine agree that the metro TV ad market will grow by around 2.5% next year and how much is that in actual dollars?
That’s a whole $72 million on metro TV revenue of $2.9 billion in the year to June this year, which is not a whole lot of extra money.
Seven and Nine will get around $50 – $54 million of that, assuming they keep their current shares of TV ad revenues of around 40% and 38% respectively.
It doesn’t leave much for Ten to build a recovery on, based on what we know about its programming.
(And, by the way, that small increase is why the Nine float is a short term play, at best).
And if the Australian economy slows further in 2014 as the high dollar continues, unemployment rises and retail spending remains weak in mainstream stores, what will happen to TV ad revenues?
Investment in Seven and the Nine float are a punt on the economy doing better in 2014, or at least no worse than in 2013. Investing in Ten is a wing and a prayer job, and a lot of fingers crossed.
For example, the longer the US Fed keeps its huge spending program in place, the tougher it will be for the Aussie economy and the Federal budget. Keep that in mind.
