The Australian media sector has been a target for enthusiastic short sellers, and there is little to suggest that much is changing. But in turmoil there may be potentially lucrative trades, as a Macquarie report points out today. It points out that virtually every major media company in Australia is facing not just structural change, but also challenges to ownership and control. Upheavals seem almost certain, epsecially with News Corporation experiencing pressures in its UK side.
Macquarie outlines the following scenarios:
Spin-off of newspapers, BSkyB from News Corporation
- The hacking investigations (computer, phone, pay television) are not going away (they are now being crowd sourced on Twitter), with pressure on NWS to deal with the newspapers (say spinning them off in specie) and from Ofcom regarding BSkyB (if Ofcom compels divestment). Both of these transactions should be a positive valuation catalyst for the company. In the case of BSkyB, this is a premium asset which could be sold at higher levels than current, and in any case it would put another US$7b+ into the buyback.
Fairfax – is there a change of control taking place?
- Gina Rinehart now has 13% of the stock in the company, and her ultimate intentions remain unclear. We continue to hold a negative view towards FXJ, but should she prove unsuccessful in her push for board representation, she may look to increase her shareholding. This could drive the price higher.
Sale of Austar to Foxtel
- We view this as the first part of the transaction only. The Foxtel register is inherently unstable, with Kerry Stokes looking for James Packer to exit Consolidated Media Holdings (not unlikely, when Packer’s aspirations for Echo/Barangaroo are considered). At the same time, TLS is withdrawing from the telephony infrastructure business and is reported to be reviewing its shareholding in Foxtel – i.e. buying more. Most likely, this makes CMJ a buy.
- It could also be that if Stokes (through SVW) does move to take CMJ, the holding is ultimately destined for SWM. Ten Network – mergers with DMG Radio, SXL and a spin-off of Eyecorp
- The acquisition of Ten by News Limited has been mooted, but more likely in our view is that Ten merges with DMG Radio, half owned by Lachlan Murdoch (who cashed up his $22m holding in Prime last week). If the Convergence review sees the 75% audience reach rule repealed, the TEN SXL merger would also be possible. The sale of Ten’s Eyecorp business is ongoing.
Recapitalisation of Nine Entertainment Co
- The debt package is due in February 2013, so a change of the debt/equity mix is likely, especially now that the mezzanine debt will be converted to equity, subject to the refinance. INM potential sell down of its 30% stake in APN
- Major shareholder INM (30%) is facing severe financial difficulties across its Australian, Irish and South African publishing businesses (it trades on a trailing PE of only 2.5x with a balance sheet geared to over 4x). This raises the prospect of a liquidity event, should it sell down.
A sell down of News’ newspaper assets is very possible, given that it would unleash value elsewhere in the empire. But it is unlikely while Murdoch remains in charge. In Australia, it is the old Herald and Weekly Times assets that are still valuable. What Rinehart is up to is anybody’s guess, but the radio stations seem the most likely prize for her interests. A recapitalisation of Nine is very likely.
It all adds up to very perilous waters, given that many of the basic advertising problems have not been solved, especially in the print sphere. There may be trading plays, but that is about it.