Seven West Tempts Buyout on Advertising Rebound: Real M&A
No television broadcaster in the developed Asia-Pacific region is tempting its owners with a cheaper buyout opportunity than Seven West Media Ltd. (SWM)
Seven West, which beams the TV drama “Downton Abbey” to Australian homes, operates a web portal with Yahoo! Inc. and publishes Men’s Health magazine locally, has fallen 57 percent this year as investors worried about its debt amid a slowdown in advertising sales. The stock traded yesterday at 3.9 times earnings, less than any media company in the region with a market value of more than $100 million, according to data compiled by Bloomberg.
That’s a price that may compel Perth-based Seven West’s billionaire chairman Kerry Stokes, who yesterday agreed to sell another media asset, to attempt a takeover, BBY Ltd. said. Growing audiences will allow Seven West to boost revenue when advertising rates recover in 2014, estimates Commonwealth Bank of Australia. Stokes and co-investor KKR & Co. (KKR) could offer a premium of 31 percent for the $1.3 billion company and still generate a 31 percent return on their investment in two years, according to Royal Bank of Scotland Group Plc.
“The time to buy them is when everyone hates them,” said Tim Montague-Jones, an analyst at Morningstar Inc. in Sydney. “They own leading assets, and when conditions do turn they will get a disproportionate share of the extra revenue that flows into the industry. This sector, especially TV, turns on a dime.”
Stokes owns 68 percent of Seven Group Holdings Ltd. (SVW), which owns 31 percent of Seven West, according to the companies’ 2012 annual reports. Simon Francis, a Sydney-based spokesman for both companies, didn’t return calls seeking comment on a possible buyout. Ian Smith, an Adelaide-based spokesman for KKR, declined to comment on speculation of a buyout.
“Our market leadership and current profitability are not reflected in our share price,” Stokes said in a letter to shareholders in Seven West’s annual report, released yesterday. The mismatch “is a primary concern,” he said.
The shares rose 0.8 percent to A$1.30 at the close in Sydney today.
Seven West, Australia’s biggest media company, was formed in April 2011 when West Australian Newspapers Holdings Ltd. acquired Seven Media Group from Stokes and KKR. The buyout firm owns at least 8.5 percent of Seven West, the annual report shows.
Seven West owns the 180-year-old West Australian, Perth’s only daily newspaper, and publishes more than 25 magazines, according to its website. Still, more than half of its A$1.9 billion ($2 billion) in revenue last year came from advertising around TV programs including “The X Factor” and Australian drama “Home and Away,” data compiled by Bloomberg show.
A slowdown in advertising demand has hit profits as broadcasters including Seven cut rates, according to Fraser McLeish, a Sydney-based analyst at RBS. Stokes and KKR could make an “opportunistic” bid for Seven West after stock investors overreacted to the downturn, he said.
In the year ended June 30, operating income at Australia’s most-watched free-to-air broadcaster dropped 14 percent to A$473 million, according to company filings that make a comparable year-ago comparison. Earnings from the television unit fell 15 percent.
“As soon as demand picks up, they’ll be able to rein in those discounts, and because Seven’s ratings are so solid, the advertisers are going to want to be on Seven,” McLeish said. “It’s about having good programming that’s producing solid ratings.”
A recovery could begin as soon as next year, he said.
Weak demand for advertising followed a consumer spending slump in Australia after the central bank raised its benchmark interest rates to 4.75 percent in 2010, the highest in the developed world, pushing up the savings rate. The Reserve Bank of Australia began cutting rates last November, lowering the benchmark to 3.25 percent on Oct. 2.
Swap traders currently expect rates to be cut again next month to 3 percent, a level that would match the record low reached during the global financial crisis in early 2009.
“Advertising runs entirely on consumer confidence,” Harold Mitchell, executive chairman of buyer Aegis Media Australia, said in a phone interview. “Once confidence returns, which it will, advertising will boom again.”
TV channels owned by Seven West, which has the free-to-air broadcasting rights for Australian Football League matches until 2016, had a combined market share of 24.6 percent in the nation’s five biggest cities through September, up from 22.7 percent at the start of the year, according to the most recent survey by Oztam Pty, the country’s official provider of TV viewing data.
Second-ranked Nine Entertainment Co., which is owned by CVC Capital Partners Ltd. funds, is in talks with its creditors to restructure A$2.8 billion of debt.
Shares of Ten Network Holdings Ltd. (TEN) -- part owned by Gina Rinehart, Asia’s richest woman, billionaire James Packer and Lachlan Murdoch, Rupert Murdoch’s son -- fell to a record low last month. The third-most watched channel’s chief programmer, David Mott, quit in August after new shows flopped.
Both Nine and Ten, which like Seven take their name from their original programming frequency, have lost ground in the ratings to Seven West, Oztam’s data show.
“It’s almost impossible to turn a performance around quickly,” said Mitchell at Aegis Media. “Seven has been laying down a platform of audience development for almost a decade and they have a leadership position. If they continue to invest in programming and if Nine fails to solve their ownership position, Seven will get even bigger.”
Seven West’s debt has weighed on its share price, said Alice Bennett, an analyst at Sydney-based Commonwealth Bank. Adjusted for a capital raising in August, the company’s net debt stood at A$1.4 billion, Seven West said on Aug. 22. The company said in July that the average tenor of its debt was about three years.
The debt is unlikely to be a problem without a “substantial slowdown” in advertising, and the borrowings instead may help propel the business when advertising demand picks up in 2014, Bennett said.
“Financial leverage works both ways,” she said in a phone interview. “When the market turns, Seven West will have strong operating and financial leverage combined.”
After falling to its lowest ever price-earnings multiple last month, Seven West closed yesterday at A$1.29, or 3.9 times its earnings of 33.3 cents a share in the year through June, according to data compiled by Bloomberg. That’s cheaper than any local media company worth more than $100 million in developed Asia, the data show.
“The numbers look almost too good not to have a look at it,” said RBS’s McLeish. “The share price has fallen to levels we never thought we’d get to.”
McLeish has a sum-of-the-parts valuation of A$2 and a share price forecast of A$1.80 on Seven West. His analysis shows that Stokes and KKR may be able to generate an internal rate of return of as much as 31 percent if they buy the company now for A$1.70 a share and sell it again in two years.
That depends on the buyers selling it at a multiple of 8 times his estimated earnings before interest, taxes, depreciation and amortization for fiscal 2015. In 16 takeovers of Australian media companies, acquirers have paid a median of 13.5 times trailing 12-month Ebitda, data compiled by Bloomberg show.
Stokes could partially fund the deal from the sale of Seven Group’s 25 percent stake in Consolidated Media Holdings Ltd. (CMJ) to Rupert Murdoch’s News Corp., according to McLeish. Consolidated Media agreed to be acquired by News Corp. in September for about A$1.94 billion.
Seven Group said yesterday it plans to support News Corp.’s bid, a decision that should generate about A$485 million for Stokes’s company, according to data compiled by Bloomberg. The Australian Competition & Consumer Commission the same day blocked Seven Group from making its own bid for Consolidated Media.
Stokes may already have laid plans for a buyout of Seven West, according to Mark McDonnell, an analyst at Sydney-based BBY Ltd. Specifically, a capital raising of about A$440 million in August was meant to repay debt, even though no borrowings were coming due, he said.
“It was curious at the time -- they had no imminent refinancing,” McDonnell said in a phone interview. “It now looks to be something far more likely, which is it’s actually about reducing the debt prior to a merger with Seven Group Holdings so the total debt level will be moderated.”
Stokes, who began his media investments in Western Australia in the 1970s, is always looking for an investment opportunity, according to Aegis’s Mitchell, who said he has known the billionaire for more than 20 years.
“If it was better to be a private entity, I am sure Stokes would make that move,” he said. “He’s always been a long-term thinker. In the end, people want to sit down in front of the box and be entertained.”
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