Channel Nine has announced it is going to go public. What is on offer, and should you buy a piece of the house that Kerry built?
It’s easily the most-anticipated sharemarket float of the year: Channel Nine, the grand old dame of Australian TV, is going public again. So why is it happening, what’s at stake, and should you buy shares when they come up for grabs in December?
Why is Nine floating?
To answer this question we must go back to 2006. Following the death of his father, Kerry, James Packer sold 50% of Publishing Broadcasting Limited — whose assets included Channel Nine and ACP Magazines — to private equity firm CVC Asia Pacific. A year later, CVC picked up another 25%. All up, the firm splurged $5.6 billion on PBL. The deal proved disastrous; by 2012 CVC had lost $1.8 billion on its investment in Nine and owed lenders $3.8 billion. A whopping 80% of this was owed to two hedge funds, Apollo Management and Oaktree Capital. It was clear CVC would have to take a bath, and it did.
In a tense, complicated deal that played out over months, Apollo and Oaktree eventually agreed to a “debt for equity” swap in which they took control of 95.5% of the company.
But Oaktree and Apollo were never interested in long-term Australian media ownership; they’re opportunistic firms that specialise in picking up distressed assets and selling them off for a profit. So, as part of the deal, Nine’s board members were required to take “reasonable efforts” to prepare the group for a public listing. And that is exactly what they’ve done.
What is on offer?
The cornerstone asset remains Channel Nine, the top-rating television station for most of Australian history. Seven is still the nation’s most-watched network, but Nine has tightened the gap dramatically over the past two years — it now has five of the top 10 highest-rating programs and is winning the key advertiser-friendly demographics of 18-49 and 25-54. Nine CEO David Gyngell has managed to hold on to the NRL and cricket rights, although at prices far higher than he would have liked. Nine has also expanded its national reach by buying regional stations in Perth and Adelaide off regional partner WIN earlier this year.
As of mid-October, Nine is also the sole owner of digital company Mi9 — formerly a joint venture with Microsoft. Mi9 owns ninemsn, one of the country’s most-visited websites, and other online assets.
Then there’s Ticketek, which sells 18 million tickets a year, and the giant Allphones Arena at Sydney Olympic Park. Nine also owns a third of Sky News, alongside Channel Seven and BSkyB.
What is the process?
Nine is expected to start trading on the stock exchange as early as December. UBS, Morgan Stanley and Macquarie Bank are leading the sale.
Anticipation is building towards the release of Nine’s financial prospectus next week. As a private company, Nine’s earnings, revenues and the value of the different parts of its business have been secret. Now these will be laid bare — starting with the prospectus.
“The first thing I will go to is the financial statements to clarify what the position really is,” BBY media analyst Mark McDonnell told Crikey. “I will look at revenue, operating earnings, cash flow, how the different parts of the business fit together. What is the valuation of Ticketek, for example?”
Nine’s market capitalisation — i.e. the total value of the business — is expected to be between $2.4 to $2.9 billion. Shares will be marketed at $2.05 to $2.30, Bloomberg has reported. This compares to rival Seven West Media, which has a market cap of $2.44 billion and share price of $2.46.
The hedge funds are expected to maintain a significant stake in Nine after the float, but they are likely to eventually sell down their shares.
Is it a good buy?
As Nine’s spin team are pointing out to potential investors and the business press, the company has a lot going for it. Ratings are up, sports rights are in the bag, and the purchase of WIN Adelaide and Perth will provide a welcome revenue boost. The dismal performance of Channel Ten means Nine’s second-place position is unchallenged. Nine is also making a virtue of the fact that, unlike Seven West Media, it no longer owns any print assets after offloading the ACP magazine stable last year.
There’s no doubt Australian commercial free-to-air television is holding up better than print, and better than in other parts of the world. Anti-siphoning laws mandating popular sporting events be shown on free-to-air TV work to the networks’ advantage. And the take-up of pay TV remains far lower than in the US and UK. Event television — think The Voice or the NRL grand final — still draws in millions of viewers and remains the most popular way for advertisers to reach a mass audience. Data obtained by Crikey in August showed TV’s share of media agency spend was holding up relatively well: agency bookings for metropolitan TV dropped by 2.4% over the past year, compared to 21.3% for metro newspapers.
But the volatile world of TV is far from the safest option for investors. As the rise of Nine — and decline of Ten — in the ratings shows, a network’s fortunes can change dramatically thanks to a few hits.
And looking longer term, there’s no doubt Nine will be increasingly buffeted by the rise of the internet. Online video advertising remains niche, but it is becoming increasingly popular with advertisers. Then there’s subscription video on demand services such as Netflix. While take-up is far slower in Australia than the US, media analysts believe the rise of video on demand is irresistible.
In its latest annual advertising forecast, Venture Consulting predicts free-to-air TV will decline from $3.45 billion in 2012 to just over $3 billion in 2016. Online advertising revenues, meanwhile, are predicted to almost double from $3.3 billion to $6.2 billion.
BBY’s Mark McDonnell says the biggest trends affecting the TV industry are the proliferation of content providers (think multichannels and online operators), consumer empowerment and the fragmentation of audiences. “It will be a huge challenge for Nine and all the free-to-air networks,” McDonnell said. “At this stage it’s happening around the margins, but it’s certainly clear the golden days are gone.”