SCA’s turning its back on ARN Media’s overture for a deeper relationship hasn’t surprised market analysts.
But ARN Media, after detailed due diligence, now knows SCA’s radio assets more intimately, identifying the synergy potential.
And private equity group Anchorage Capital, ARN’s partner in the now failed bid for SCA, has cash, $300 million of it recently raised for one of its funds.
“We would not be surprised if ARN Media and Anchorage Capital Partners re-engage with Southern Cross sometime down the track,” writes Morningstar’s Brian Han in a note to clients.
And SCA, rejecting the current pitch, is "willing to consider any revised proposal".
The complicated offer, made in October last year, valuing SCA at $330 million, was made up in part cash and part shares.
SCA says mutual due diligence work shows "fundamental changes" to the economics of the proposal, including an increase in the leverage and reduction in the earnings base of a new company being formed.
This had "significantly reduced" the value of the proposal to SCA shareholders.
The big failure point was how to value a reconstituted ARN (ARN NewCo) which, under the proposal, would have carried most of SCA’s and ARN’s metropolitan radio stations and some of the regional ones.
“Southern Cross does not disagree with the merits of the takeover and the carve-up of its assets, allowing consolidation in the radio market and ridding it of the regional free-to-air TV business,” says Han at Morningstar.
“It just disagrees with the value being placed on its operations, especially with the earnings upside from the substantial cost-out targets on which management has staked its entire credibility and future.”
Now SCA still has to deal with grumbling shareholders, some of whom want to spill the current board of directors.
Analysts at Ord Minnett Research, in a note to clients, write that SCA management had been grappling with how to value the reconstituted ARM Media under the deal, of which SCA shareholders would own 33%.
“Due diligence and information exchange between the parties to date have failed to provide any clarity and are muddying the picture even more,” said the analysts.
“Meanwhile, long suffering shareholders of Southern Cross are agitating for action, any action, to engage with the suitors and realise value.
“Under these circumstances, we believe Southern Cross had no choice but to formally reject the proposal in the first instance.”
The deal was for a reconstituted ARN Media to hold most of SCA and ARN’s metropolitan radio stations but only some regional ones.
SCA's regional TV stations will also be carved out of the vehicle. And the soon-to-be-profitable digital radio unit will be separated and combined with ARN Media's digital radio under a joint venture in which ARN NewCo will be a 50% partner with Anchorage.
“If all that makes an investor's head spin, spare a thought for management trying to assign a value to ARN NewCo,” says HAn at Morningstar.
“We are not privy to the earnings attributed to the ARN NewCo businesses or the projected synergies. However, according to Southern Cross, these amounts are declining, and the vehicle will have more debt than previously thought.
“Against that backdrop, we can't blame the Southern Cross board of directors for rejecting the overture, if only to show disgruntled shareholders they are not sitting still.”
The SCA directors also see more value in their company following the release of half year results.
The company reported revenue down 2.9% to $252.6 million for the half year to December and net profit after tax at $4.4 million, a drop of 71.1%.
But its strategic cost management review is ahead of target and will deliver about $20 million in savings in the current financial year.
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