Seven West Media, whose business was challenged before the coronavirus economic infection sickened advertising dollars, has some challenges approaching.
The current market capitalisation of $129.2 million, with a share price at 8.4 cents each, is a long way from covering net debt of around $569.5 million.
In February, when Seven West announced half year results -- statutory net loss after tax of $66.35 million in a "challenging" advertising market -- the market capitalisation was $315.3 million with shares dropping and a long way from the 58 cents 12-month high but still trading at more than 20 cents each.
A soft metro TV market was then overtaken by the pandemic.
“The pandemic's impact on earnings has substantially elevated our concerns,” writes senior analysts Brian Han at Morningstar.
“While TV revenue market fell only 8% in the March quarter, the real damage will begin from the current June quarter and likely to the tune of 40%-plus decline.”
Not having to pay out for suspended sporting events -- including the Tokyo Olympics and the AFL -- will help Seven West on the costs side but do little for revenue.
“There is no hiding from the severe revenue pressure, compounded by the absence of sports-anchored promotional platform to lift ratings,” says Han.
One way to tackle debt is to raise capital.
A few companies on the ASX have been doing this to get debt off the books and prepare for lean times ahead.
Among them, outdoor media specialist oOh!media has raised $167 million to pay down debt and position the company to take advantage of the eventual upturn in the advertising market.
At Seven West, Morningstar’s Han describes the debt level as “precarious”.
This would be improved, but not by enough, when the company’s $40 million sale of Pacific Magazines goes through as planned to Bauer Media.
This deal is due to be completed tomorrow (Friday). But Bauer is itself not doing well, announcing this week job cuts and standowns and the temporary suspension of print publications.
“With the stock price in the doldrums, a capital raising would also be challenging given the likely massive number of shares and discount needed to entice take-up,” says Han.
Other asset sales, such as the Perth headquarters and Seven Studios, will be difficult in the current market.
So what is the value of Seven West?
“As such, the time has come to consider the possibility of there being no value in Seven equity,” says Han.
“We are prepared to assign a 50% probability to this scenario.”
Han asks: Could Seven raise $200 million to recapitalise the balance sheet and ensure survival until the pandemic passes?
That would involve issuing 3.4 billion new shares (2.2 times the current 1.5 billion shares on issue), assuming an issue price discount of 30% on the current share price.
If the current 40.9% shareholder and chairman Kerry Stokes decides to participate and maintain his interest, he would have to pay up more than $80 million.
Han thinks Stokes may as well as buy out the minority at a 30% premium to the current stock price, or about 11 cents a share, at a cost of around $100 million.
“Or he may do nothing at all in which case the prospect of a successful capital raising would dim substantially,” writes Han.
The next few months don’t look like much fun for Seven West.
Morningstar forecasts the metropolitan TV advertising revenue market to end the financial year down 17%, with a 45% fall in the current June quarter.
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