David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

One of the strange things about television is how some shows can keep getting renewed years after their peak.

Take Australian soap opera Neighbours. These days, it attracts a domestic audience barely a tenth the size of the two-million odd who watched the wedding of the characters played by Kylie Minogue and Jason Donovan back in 1987. And yet, it continues.

Ten Network Holdings Ltd., the ailing firm that still broadcasts the soap, is in a similar situation.

Decline and Fall
Ten's share price has been circling the plughole for five years
Source: Bloomberg

It hasn't posted a profit since 2011, and has forecast its seventh consecutive annual loss in the year through August. An announcement in April that it may be unable to continue as a going concern was the second such declaration in just over two years. Now, the investment vehicles of Rupert Murdoch's son Lachlan and local television magnate Bruce Gordon have dealt a further blow, by saying they'll end their guarantees for a A$200 million ($151 million) credit facility that's set to expire in December.

If you think all this means Ten is about to be canceled due to poor ratings, you might be underestimating the ability of broadcasters to spin out a story line.

It would be hazardous to underestimate the scale of the difficulties facing CEO Paul Anderson. Ten is the smallest of the three players in a free-to-air television market that's under permanent assault from the migration of audiences and advertising dollars online. It simply doesn't have the money to buy content that would help lift its share of advertising revenue from the current 25 percent to the high-30s enjoyed by larger rivals Nine Entertainment Co. and Seven West Media Ltd. Throw in the risk of that credit facility running out, and you have a dire predicament.

That said, there are a few reasons for optimism. Ten's problem has been relatively straightforward: Costs have remained stubbornly high even as its revenue has weakened. Impairments from the general decline of its business have further weighed on profitability.

Creaky Set
Ten's impairments and stubbornly high costs have left it with no room for profit in recent years
Source: Company reports, Bloomberg

There's evidence to think some of those factors are improving. License fees, which have been running at 4.5 percent of revenue a year, or roughly A$30 million in the case of Ten, are to be abolished as part of a government media reform package announced last month.

Ten won't be able to add the full amount straight to profit, since it will end up paying spectrum fees instead. Still, a company whose operating cash outflows averaged A$46 million over the past three years is likely to enjoy a substantial fillip.

Then there are program costs. Ten doesn't disclose its exact outgoings on this capitalized item, but you can get a decent proxy by looking at the A$395 million in program rights that it expensed last year as shows went to air.

A decent slice of that sum comes from imported U.S. shows such as Modern Family, The Simpsons, Homeland, and The Late Show with Stephen Colbert. The owners of those rights don't really need Ten's money to cover their costs, so Anderson has a relatively strong bargaining position when it comes to renegotiating contract terms: If you don't cut your prices, Ten could go bankrupt and you'll lose the revenue altogether.

Going, Going, Gone
Ten's intangible assets have been impaired away almost to nothing
Source: Bloomberg

It's also worth reflecting that the degree to which impairments can weigh on future profits is now pretty limited. Five years ago, Ten had A$1.08 billion in intangibles. Thanks to a wave of writedowns, that figure has shrunk to A$135 million.

Anderson has anything but an easy ride ahead. Ten said in April that it needs a new A$250 million loan to meet its current repayment obligations, and that that facility depends upon the provision of further guarantees. With Murdoch and Gordon backing out, only billionaire James Packer is left in the picture -- and he's shown little enthusiasm for increasing his cash outlays in recent years.

Still, there's a path to survival out there that's not much more implausible than a typical soap opera story line. Ten already posted its best operating cash performance in five years in the last half-year, thanks largely to the fluky timing of some big expenses. If license and programming changes can shave A$30 million to A$50 million from costs, it's just possible the company could have a convincing enough recovery story to persuade Commonwealth Bank of Australia to renew that advance for one more season.

Silver Lining
Ten just posted its best half-year of operating cash flow in five years
Source: Bloomberg

In the meantime, watch out for distressed-debt investors circling overhead. Oaktree Capital Group LLC and Apollo Global Management LLC know the Australian media scene well, having come out on top of the debt-to-equity swap of Nine Entertainment back in 2013.

While Commonwealth Bank sees a hope of survival for Ten, it's unlikely to sell off its loans for the sort of discount they might require. The moment that changes, though, the season finale will be imminent.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. To add insult to injury, the guarantors are technically entitled to claim a fee of at least A$31 million when the current facility expires in December, although they could do a favor to the company by taking it in the form of Ten's useless shares rather than cash.


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David Fickling in Sydney at

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