Ten Network May Lose Going Concern Status If Ad Sales Fall

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Ten Network Holdings Ltd., Australia’s third-largest commercial broadcaster, may not be able to continue as a going concern if it loses more advertising revenue or television viewers.

Those scenarios could result in the company failing to meet its cash flow targets and force it to raise new debt or equity, the Sydney-based company said Thursday as it reported a first half loss. Current forecasts indicate the company will operate within the limits of a A$200 million ($160 million) funding facility over the next 12 months.

Ten, whose shareholders include billionaires James Packer and Gina Rinehart, has struggled to keep viewers from switching to rivals as its share of advertising revenue slumped to about 20 percent. The company is said to have received numerous approaches over the past six months, with potential bids from Time Warner Inc., Discovery Communications Inc. and News Corp.’s local pay-TV operator Foxtel.

“They seem to be burning cash, which is probably not a long-term sustainable solution,” said Sean Fenton, who helps manage about A$5.7 billion as a portfolio manager with Tribeca Investment Partners Pty. “You certainly don’t see that very often,” he said, referring to the ‘going concern’ notice.

Asset Liquidation

A going concern notice indicates that Ten may find itself unable to pay its debt, and face liquidation of its assets, at some point within the next 12 months. That prospect makes a deal with another company the most likely option, said Fenton.

Shares of Ten were unchanged at 20.5 Australian cents as of 2:45 p.m. in Sydney. The stock has lost 86 percent of its market value in the past five years.

Ten posted a loss of A$264 million in the six months ended Feb. 28, weighed down by a A$251 million writedown of its television license.

The country’s license fees, levied by the government at 4.5 percent of gross revenue, “are among the highest in the world,” Executive Chairman Hamish McLennan told an investor call after the announcement.

That leaves free-to-air channels “at a competitive disadvantage compared to the global behemoths that we are now competing against.”

Ten has struggled to retain viewers amid competition from local rivals Seven West Media Ltd. and Nine Entertainment Co. and moves by audiences to online platforms such as Google Inc.’s YouTube and Netflix Inc.

Audience Share

Ten had a 22.5 percent share of the free-to-air television audience in Australia’s cities during 2006, trailing Nine and Seven, and ahead of state-owned Australian Broadcasting Corp. on

15.5 percent. So far this year it’s had a 13.8 percent share, behind Seven and Nine and the ABC on 14.4 percent.

That’s an improvement on a year earlier, Ten said today. Its total audience numbers are up 22 percent from the previous year at a time when numbers are down at the other two commercial networks, according to a company presentation.

Net debt at the end of February was A$92.3 million, more than 12 times Ten’s earnings before interest, tax, depreciation and amortization of A$7.5 million. Revenue fell 2.2 percent to A$324 million. The advertising market “remains ‘short’ in terms of forward bookings and is difficult to predict”, Ten said.

Rupert Murdoch

Foxtel, jointly owned by Rupert Murdoch’s News Corp. and phone company Telstra Corp., has been involved in discussions with Ten about a potential investment, Ten said in a regulatory statement Monday.

Lachlan Murdoch, Rupert Murdoch’s son and co-chairman of News Corp., was Ten’s chairman until March last year and still holds an 8.5 percent stake.

Foxtel and Discovery walked away from a 23 cents-a-share proposal last month, after shareholders including Bruce Gordon and Lazard Asset Management rejected the proposal, the Australian Financial Review reported March 23 without saying where it got the information.

“Going concern” statements are rare among large companies in Australia. Just 1.5 percent of companies in the S&P/ASX 200 index reported going concern issues in 2013, according to a report last year by CPA Australia.

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