Australia’s Ten Network Ripens as Cheap Target: Real M&A

Ten Network Holdings Ltd., weighing a possible sale, is so cheap that acquirers can buy the Australian television channel for less than the value of its broadcasting license.

After a string of programming flops and two years of losses, Sydney-based Ten is working with Citigroup Inc. on options that may include seeking a buyer, people familiar with the matter said, asking not to be identified discussing private matters. The Australian Financial Review reported last month that buyout firms were considering bidding for Ten, whose shares have languished below A$1 for more than three years.

An acquirer may be able to rebuild Ten’s audience by buying rights to air more sports, and the company’s license alone is worth 13 percent more than its A$697 million ($653 million) market value at yesterday’s close, Credit Suisse Group AG said. As the government considers easing media ownership rules, suitors also might include Rupert Murdoch’s News Corp., said Morningstar Inc.

“It could be a very good deal and a very astute bit of timing for a would-be buyer,” Greg Smith, head of research at Sydney-based Fat Prophets Pty, said by phone. “It only takes a couple of big hits to get things right back on track.”

Ten’s shares rose 3.8 percent today to 27.5 Australian cents in Sydney, their highest close since June 18. The benchmark S&P/ASX 200 Index gained 0.6 percent.

A spokesman for Ten declined to comment on work by Citigroup bankers or any proposal to sell the company. A representative for Citigroup and a spokesman for News Corp. in New York also declined to comment.

Ads Drop

Ten is Australia’s No. 3 free-to-air television broadcaster behind Seven and Nine. Murdoch sold control of Ten in 1987 and the billionaire’s son Lachlan and casino operator James Packer now own 8.8 percent stakes, according to data compiled by Bloomberg. Gina Rinehart, Asia’s richest woman, has a 9.8 percent holding.

Despite airing U.S. hits such as “24,” Ten’s share of viewers and advertising has shrunk in part because it lacks the rights its rivals have to broadcast the nation’s most popular sports. Seven airs Australian Football League games, sometimes known outside the country as Australian rules football. Nine shows rugby league matches.

Buyout Play

In the second half of 2013, Ten won just 22 percent of Australian commercial television’s advertising revenue, down from 30 percent in 2009. This year, its revamped breakfast show -- a key timeslot to lock in viewers -- was ditched within months of first airing. In a survey last month of Australia’s 20 most-watched free-to-air programs, Ten had only two.

While Ten Chief Executive Officer Hamish McLennan is taking steps to cut costs and jobs, Ten will post losses through 2016, according to analysts’ estimates compiled by Bloomberg. Ten’s stock price is heading for a fifth consecutive annual decline.

“Maybe private equity is a sensible location for it,” Tim Montague-Jones, a Sydney-based analyst at Morningstar, said by phone. “I’m sure a lot of people will be running the numbers.”

Providence Equity Partners LLC, a Providence, Rhode Island-based buyout firm focused on media, has started work on a potential bid for Ten, the Australian Financial Review reported June 23.

Ten is also attempting to sign cheaper agreements to run shows made by studios including CBS Corp., the newspaper said. A representative for Providence declined to comment.

License Value

A turnaround under a new owner may hinge on sport. Australian Football League television rights, which fetched A$1.25 billion in 2011, expire in 2016. The rights to show rugby league games sold for A$1 billion in 2012 and run until 2017.

“A potential acquirer would have to be prepared to invest materially upfront for the network and sports rights,” said Samantha Carleton, a Sydney-based analyst at Credit Suisse Emerging Companies (Australia) Pty. “It would be a long-term investment.”

With viewers drawn by weekend sport, Ten could promote its other programs to the same audience, said Morningstar’s Montague-Jones.

At the same time, it’s in the interests of advertisers to sustain Ten in order to limit the control of Seven and Nine, said David McGregor, managing partner for Australian technology, media and telecommunications at Ernst & Young Global Ltd.

“The Australian marketplace is looking for some credible players in that advertising space,” he said in a phone interview from Melbourne. “There is value in a TV license.”

In a June 20 report, Carleton at Credit Suisse valued Ten’s license at A$786 million.

Law Change

Changes to existing media laws raised in a discussion paper last month by the Australian government could enhance Ten’s appeal to potential buyers, said Angharad Lewis, a lawyer in Clifford Chance LLP’s Australian M&A and media team in Sydney.

The report discussed repealing laws that limit the geographic reach of commercial television ownership, and the variety of media -- among radio, newspapers and television -- that can be owned by a single entity in one area.

“Any change to current regulations could allow international or domestic players to buy Ten and add other businesses to it, like a regional network or other radio licenses,” said Lewis.

According to some analysts, Ten’s prospects are dim. The network’s share of the advertising market isn’t enough to support the company, Alice Bennett, a Melbourne-based analyst at Commonwealth Bank of Australia, said in a June 19 report. It must make deeper cost cuts or spend more on programming, she said, valuing Ten shares at just 17 Australian cents.

All the same, Ten’s turnaround efforts may be starting to take hold, according to Fat Prophets’ Smith, who is based in Auckland, New Zealand.

Since the new season of “MasterChef Australia” started in May, Ten’s prime-time audience in the nation’s biggest cities has grown, the company said last month.

“As a potential buyer, you’re potentially getting an asset at or near the bottom,” said Smith.

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