Southern Cross Climbs to 22-Month High on Merger Report

Southern Cross Media Group Ltd., Australia’s largest listed rural broadcaster, rose to a 22-month high in Sydney trading after The Australian reported its board met about a potential merger with Nine Entertainment Co.

The shares rose 3.3 percent to A$1.575 at the close in Sydney, their highest since May 2011, after the newspaper said the merger could create a A$4 billion ($4 billion) company. Southern Cross “is reviewing a number of strategic options” and such a deal is “effectively prohibited” under current media regulations, the Melbourne-based company said in a regulatory statement.

Rules that have stopped mergers between Australia’s main free-to-air commercial broadcasters may change under laws the government has promised to introduce to parliament this year. A merger with Southern Cross would help Apollo Global Management LLC and Oaktree Capital Group LLC, the funds which took control of Nine in a debt-for-equity swap approved in January, prepare an exit from the investment, said Fraser McLeish, an analyst at CIMB Group Holdings Bhd. in Sydney.

“This would bulk up the company before any initial public offering,” said McLeish. “They’d both be able to generate market share and revenue upsides from switching their regional content from Ten to Nine.”

Media Rules

Under Australia’s current media rules, Nine, Ten Network Holdings Ltd. and Seven West Media Ltd., which own the country’s main free-to-air commercial networks, can only broadcast in major cities. Southern Cross, Prime Media Group Ltd., and closely-held WIN Corporation Pty. have agreements to rebroadcast most of the major networks’ content in rural areas.

Southern Cross’s agreement with Ten expires in the middle of this year, the company said today, and “there may be speculation regarding the strategic direction of the company in that context.”

The company Feb. 19 blamed weak audiences for Ten’s shows, as well as the withdrawal of advertising after a hoax call to a London hospital about the Duchess of Cambridge, for an 8.9 percent fall in trading revenue in the six months through December.

The two companies had combined revenues of about A$1.71 billion in the year through June 2012, based on Southern Cross’s reported results and Nine’s 35 percent share of Australia’s A$2.97 billion television advertising market during the period.

That would value the combined group at A$6.16 billion including debt, based on the median 3.6 multiple in 15 combinations of media companies worth at least $1 billion over the past three years.

Before it's here, it's on the Bloomberg Terminal.