A merger between News Corp and Network Ten is more likely to win approval from regulators than a News Corp Nine Network tie-up, says Citi in a fresh report that predicts an oncoming flurry of rapid M&A activity across Australia's media sector.
News Corp's long-rumoured acquisition of ailing Channel Ten has swung back into headlines this week after a reported bout of talks collapsed between Murdoch's firm and its financial backers in the deal, Providence Equity Partners. Media regulation is apparently among the hurdles raising concerns at the equity company.
“Ten is operating like it is waiting to be bought. It's currently on life support, which is a shame because it's an under-utilised asset with huge potential,” one media group boss told AdNews.
Yesterday's SMI numbers see Channel Ten hovering at 20%. While Ten has talked of a turnaround after a difficult 2013, Ten's SMI figures in February 2013 were also around the 20% mark, suggesting little change in the past 18 months.
Citi, however, plays down the issue of regulatory approval. In its Australian Media – Battle Lines Are Being Drawn on M&A report, it says: “We believe a NWS-TEN merger is more likely to achieve approval from the regulator...given the already challenging operating outlook for TEN and its relative market share of the advertising revenue is much smaller.”
The government recently put on ice plans to reform media regulation laws, where it was thought to be easing the “2 out of 3” rule (limiting ownership across TV, print and radio) and the “Minimum Voices” test stating that in metropolitan markets there must be a minimum of five voices per market.
The '2 out of 3 rule' would potentially block News Corp's acquisition of Ten because of Lachlan Murdoch's 100% ownership of Nova Entertainment and his board position at News Corp. However, it has been suggested that the deal could be done without rule changes.
Another potential Murdoch play for the broadcaster could involve 20th Century Fox making the acquisition, analysts have suggested. Ten already has in place output deals with Foxtel and CBS. One Sydney-based analyst explained: “20th Century Fox is a possibility, but the issue that comes there is the 55% local content Ten is required to broadcast. So, they can't just fire everyone and push out [their own] content. Unless they lobbied government to change the rules.”
Another media agency CEO told AdNews that Channel Ten is being used as a “sacrificial lamb” to force government to stand down and swiftly bring about change to media regulations to make the mergers and acquisitions landscape more attractive to buyers.
Three types of buyers have been mooted as potential suitors for Channel Ten: a local, already-established media company with an eye on expansion to safeguard its position (News Corp); a large, overseas company wishing to take advantage of the Australian market (a CBS, or Viacom) or an outsider wishing to diversify its offering (Netflix).
Channel 5 – the UK's smallest free-to-air commercial channel – was acquired by MTV-owner Viacom for US$450m in May this year. The two are now working on joint content commissions. Viacom's deal is also namechecked in the Citi report, where it explains that US and European deals are coming in at the 'upper end of the range' with values eight-to-11 x EV/EBITDA.
“For News Corp, which is looking to complement its newspaper and cable channel businesses, the lack of profitability could be offset by cross promotional benefits and cost synergies. This would make Ten an attractive M&A target at a reasonable price,” says Citi.
Viacom also has close commercial relationships with Murdoch-owned Sky Media and other assets.
Meanwhile, Citi advises Southern Cross Media to sell its metro radio stations, stating that a cash injection would “address its stretched balance sheet”. A likely buyer for Southern Cross would be Nine, reducing the likelihood it would make a play for Nova, clearing the decks for News Corp's Channel Ten purchase.
Regional TV firm WIN boss Bruce Gordon only four days ago increased his shareholding in Ten to just under 15 per cent after buying an extra two million shares. Chairman Hamish McLennan was issued only two weeks ago with a further 25m shares in the firm as part of an Executive Incentive Share Plan approved by Ten shareholders in December 2013. Executives issued with these shares must hold them for three years and can sell them over the subsequent three years subject to passing undisclosed performance hurdles.
One source told AdNews, “Potential buyers don't think they need to rush. So Ten is stuck in no-man's land because there are a limited number of bidders sitting back thinking that they don't need to over pay. Or Ten could not sell, and hope it doesn't run out of money. They can keep going for two to three years.”
Shares in Ten slumped as low as 24.5c this year. The stock closed last night at 26c.
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