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CVC Cedes Control of Nine in A$2.3 Billion Debt-Equity Swap

CVC Cedes Control of Nine in A$2.3 Billion Debt for Equity Swap
Nine owns Australia’s second-most watched television channel as well as the country’s largest indoor music venue and Ticketek, an event ticketing company. Photographer: Cameron Spencer/Getty Images

CVC Capital Partners Ltd. relinquished Australia’s second-largest television network Nine Entertainment Co. to creditors, according to two people with knowledge of the matter, in the largest failure of a leveraged buyout in the country in at least 12 years.

About 60 percent of an initial A$5.75 billion ($5.93 billion) debt and equity investment will be wiped out, with the restructured company worth A$2.3 billion, the people said, asking not to be identified as the plan is yet to be signed. U.S. hedge funds Apollo Global Management LLC and Oaktree Capital Group LLC will take control of the broadcaster and funds represented by Goldman Sachs Group Inc. will receive a 4.5 percent stake, they said.

CVC, which bought Nine from billionaire James Packer’s Publishing & Broadcasting Ltd., had been struggling to refinance A$2.8 billion of senior debt due in February as Australia’s television advertising market stagnated. Adrian MacKenzie, the managing partner of CVC’s Asia Pacific unit who led the Nine takeover, quit the buyout group last month after 17 years with the company.

“We have a fully capitalized business,” Nine Chief Executive Officer David Gyngell told reporters as he left the talks in Sydney today. “I am not sure if all the players are happy, but I certainly am.”

Debt for Equity

Senior lenders will receive 95.5 percent of the broadcaster’s equity in exchange for the debt they hold, with mezzanine lenders receiving 4.5 percent, Nine said in a statement on its website.

“The business has great momentum and strong cash flow and now it will have the strongest balance sheet in the industry,” Nine Chairman Peter Bush said in the statement.

CVC bought control of Nine from Packer’s PBL in a series of transactions starting in 2006, investing about A$2 billion in equity alongside a A$3.75 billion loan.

CVC will lose its original equity and regain a small share of the business by converting its holdings of mezzanine debt into new equity, the people said.

“Nine will be in a stronger position as a result,” Mark McDonnell, an analyst at BBY Ltd. in Sydney, said by phone before today’s announcement.

Nine owns Australia’s second-most watched television channel as well as the country’s largest indoor music venue and Ticketek, an event ticketing company. Its most popular television programs include the Australian version of Big Brother, British motoring show Top Gear, and CBS Corp.’s crime drama the Mentalist.

Lenders normally take control of companies that can’t meet their interest payments, with senior debt holders getting first preference to be repaid.

Paid Out

So-called mezzanine debt holders, which include funds represented by Goldman who are owed about A$1 billion, are next to be paid while equity investors are normally only entitled to a share once all creditors are paid out.

Set up by James Packer’s grandfather Frank Packer in 1956 as Australia’s first television station, Nine’s maiden broadcast was presented by Bruce Gyngell, father of the current chief executive.

This isn’t the first time that an investor has lost money on Nine.

James Packer’s father Kerry sold the network to Australian investor Alan Bond in 1987 for A$1 billion, buying it back for A$250 million when Bond went bankrupt less than three years later.

“You only get one Alan Bond in your lifetime,” Kerry Packer remarked, according to Paul Barry’s 1993 biography “The Rise and Rise of Kerry Packer”.

Valuation Falls

The A$2.3 billion valuation of the restructured company is about 60 percent below what CVC paid to take over Nine.

CVC first spent A$982 million on convertible notes giving it a 50 percent stake in October 2006, before buying a further 25 percent of the broadcaster for A$526 million in September 2007 and paying A$158 million for its part in buying Ticketek and the Acer Arena music venue from PBL in June 2007.

In December 2008 it recapitalized the business with A$335 in new shares, diluting out Packer’s remaining stake.

The buyout group has holdings valued at $42 billion, including $6.85 billion in its three Asia-Pacific funds, according to its website.

Since CVC’s debt-funded takeover close to the peak of the private equity boom before the 2008 financial crisis, Nine has been hit by stagnant advertising markets as Australian consumer spending has languished.

The country’s households, which never saved more than 5.1 percent of their income in the decade up to September 2008, haven’t saved less than 8.1 percent of earnings since then, a rate more than double that in the U.S. That’s crimped the funds available to spend on consumer goods.

Stagnant Bookings

Advertising bookings in Australia’s metro television market, in which Nine has the biggest audience after Seven West Media Ltd., have stagnated over the past five years.

Bookings came to A$1.93 billion in the nine months through September 2007 and averaged A$1.90 billion in the same periods of the five years since, according to research group Standard Media Index. Consumer prices have risen 13 percent over the same period.

Sydney-based Nine reported A$415 million in earnings before interest, taxes, depreciation and goodwill amortization for the year through June 2011, CVC said on Dec. 8.

That’s about 9.8 percent of its A$4.23 billion gross debt load, according to data compiled by Bloomberg. It hadn’t signed off on accounts for its most recent financial year before today’s deal.

CVC has raised cash by selling off some of Nine’s assets, getting A$566 million from selling a 49 percent stake in Ltd. in March 2011. Last month it agreed to sell its magazines division to Germany’s Bauer Media Group, a deal that may raise more than A$500 million, a person with knowledge of the matter said at the time.

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