Shares in Australia’s third-free-to-air broadcaster dropped 19% yesterday after Ten Network (TEN) surprised the market and wrote down the value of its licence by $135.2 million.
Shares in Australia’s third ranked free to air TV network fell more than 17% to start with, and then turned a bit lower in the afternoon.
They ended the day at $1.15.
The write down in the licence came out of the blue and for a second year, was the biggest single hit to Ten’s bottom line, which showed the network’s full-year loss halved 50% to $156.8 million.
Underlying earnings came in at $4.5 million, a turnaround from a $12 million earnings loss a year earlier. Ten’s decision to cut the value of its licences by more than $135 million takes the amount cut from the book values in the last two years to just on $400 million.
Ten’s decision – revealed in the 2015-16 results for the year to June 30 (showing, as expected, higher TV revenues, higher ratings and a higher share of commercial TV spending, and a small positive earning figure (before interest, tax, depreciation and amortisation) – will see investors and others question Seven, Nine, Southern Cross and Prime Media about the balance sheet values for this TV licences.
All have written down the balance sheet values in the past two years (Prime caught up in the year to June 30), as they adjust to falling ad spending, fragmenting TV audiences (but still the largest group for advertisers to sell to in a single location) and rising costs, especially for live sport.
Seven has already warned that the costs associated with the Rio Olympics and the higher cost of the new AFL broadcasting contract from 2017 will see its earnings down by 15% to 20% for the year to June 30, 2017.
Nine faces higher costs associated with its new NRL contract next year and analysts wonder if this is why it is raising cash from selling its stake in Southern Cross and Sky News (it also wants to spend more to revitalise its primetime schedule).
Ten did not explain the reasons for the impairment. Ten though at the same time did warn the outlook for Australian content was poor unless the TV industry got a cut in licence fees it pays the Federal Government.
Echoing comments from Nine and Seven’s CEO (and Free TV Australia), CEO Paul Anderson said.
“Without our continued investment, Australian audiences will lose free access to Australian content and the local production sector will face a very uncertain future,” Mr Anderson said.
“Increased competition from untaxed and unregulated providers is bringing major challenges. In order to continue investing billions in a strong Australian voice on screen, this sector urgently needs a significant reduction in television licence fees.”
Mr Anderson said at 3.375% of gross revenue, Australian commercial free-to-air networks paid more than any other free-to-air broadcaster in the world at a time when “fierce competition from online players continues unchecked by any licence fee, local content or corporate tax obligations”.
“As we prepare to appear before yet another Senate committee hearing on the media ownership legislation next week, we are calling on the Parliament to take these reforms seriously and remove pre-internet era rules that are threatening diversity by making Australian media companies less competitive,” he said in yesterday’s statement.
In yesterday’s statement, Ten did not attempt to link the impairment to the licence fee argument. Ten’s Chief Financial Officer, Dave Boorman, said in the statement: “The capital raising and Foxtel issuance, combined with the improvement in the results, have put the company in a position to further invest in prime time content to continue TEN’s audience and revenue growth.”
The impairment though tell us a lot about the outlook for Ten and the industry. Its bad for Ten, its shareholders, especially Foxtel and Perpetual (The two big holders, as well as Lachlan Murdoch) and employees, and the rest of the industry. That’s because the questions raised in an impairment decision are forward looking – all about the board’s view of the ability of those assets to earning enough revenues, profits, and to generate sufficient cash, to justify the values in the balance sheet.
The Ten board and its advisers decided the earnings/cash generation potential of the major assets, the TV licences, will be weaker in the next year than they were in 2015-6, so they slashed their value by more than $135 million, after a $264 million impairment in 2014-15.
That near $400 million cut has seen the book value of the licences to $346.5 million at the end of the August financial year, compared with $732 million at the end of the 2014 year.
In fact the book value of the assets fas fallen to half annual revenues ($676 million in 2015-16, up 7.5%). In 2013-14 the book value of the licences exceeded the company’s revenue by a comfortable amount.
