No matter how you slice or dice the numbers, the Hoyts play
for Kerry Packer hasn’t been one of his best deals.

The final part of the shuffle to get the high cost, low
profit film exhibition and associated business off his private books, shows
that.

A new chum investor in West Australian Newspapers (WAN)
brought to the deal table (in an intriguing strategic play in itself) as a joint
venture partner to the in house buyer of last resort, the listed company, PBL.

All to bless what’s essentially a related party transaction
in structure, but not in all the details.

>It makes the deal appear cleaner than it is. In reality the
benefits all flow to the Packer family, leaving WAN and PBL the less certain
future returns from movie houses – check out the joint announcement here.
Just look at the terms, WAN is putting in $173.5 million,
only 8 times 2005 ebitda according to WAN CEO, Ian Law. That’s the only cash
the Packer family’s Consolidated Press Holdings is receiving.

PBL is paying with some of its high priced stock, 11.136
million shares at a weighted average price of $15.58.

That will increase the Packer’s hold on PBL by 1.7% to
39.1%. Still not to the level the other Kerry (Stokes) has in his plaything,
Seven Network of around 44%, as he
boasts about from time to time.

The 8 times 2005 earnings multiple is low compared to the
Price Earnings ratios for both companies in the present market. Both are well
above 20 times. That’s also higher than the All Ords P/E of almost 17 times
earnings.

The major competitor, Amalgamated Holdings has a P/E of 16
which is a touch under the market at the moment, pointing to the less valuable
earnings stream from movies (and Amalgamated’s other businesses).

But just what the basis for the earnings estimate is seems a
little confusing to the media. Some seem to put an earnings figure based on the
total price, including debt, which is misleading. The right earnings estimate
would be based on the $347 million WAN and PBL are actually paying(and
acquiring a further $173 million in debt).

So either it’s a bargain or it’s a ‘steal’ with a desperate
seller willing to lower the price substantially simply to get it off its hands.

Given the history of the deals involving Hoyts, right from
its acquisition and de-listing in 1998-99 for $750 million by Cons Press, it
has been a lacklustre investment.

European and Mexican cinemas were sold off for around $200
million in the wake of the privatisation.

Then in 2003 the US
screens were sold to the Regal Group in the US
for cash and shares.

The Packer mouthpiece, The Australian Financial Review
claimed this as a coup and a $100 million profit for the Packer private
interests, but Crikey corrected this
impression – Packer’s fictitious Hoyts profit.

It was a cash and scrip deal, just like the latest deal and
as Crikey explains, the price of $340
million or thereabouts was less than the debt on the US
cinema businesses of Hoyts back in the late 1990’s. And the Packers are not
known for rushing to repay debt.

As we can see from the latest deal where there’s $173
million in net debt in the Hoyts Australian business being acquired by PBL and
WAN.

Overall it would seem the Packers have raised around $850
million in cash and shares from dismembering the Hoyts group. If you eliminate
the $173 .5 million worth of PBL shares from the latest deal because it is a
related party transaction, then the Packers have lost money on the Hoyts deals.
Certainly on a time-weighted value or opportunity cost bases, Hoyts has been a
‘dog’ for Cons Press.

But losses, if any would be small compared to the $400
million lost in India
by PBL and Cons Press in the 1990s.

The Packer family also prefers cash and while PBL shares are
almost as good, you can’t see the Packers selling of the family heirloom. So
those shares will be locked away and will generate some extra dividend income
for the family.

The deal has achieved an objective, to tighten the family’s
control over the listed company, even by the small 1.7%. It’s the message the
PBL side of the deal sends to the market and shareholders that’s important.
That the Packers are not sellers!

It also lessens the prospects of a big tilt at a media asset
when the laws change next year.

Since becoming CEO in June after ousting Peter Yates John
Alexander, has paid $55 million to enter the British magazine market in a joint
venture, wrapped up the Burswood casino acquisition at a cost of $700 million,
sold out of the group controlling the Wizard home loans group for a reported
$58 million(?) profit, and committed more than $200 million into a gaming
business in Macau.

The Hoyts business will be run through the PBL Enterprises
division that includes seek.com, Foxtel and Premier Media group.

Involving WAN legitimises the transaction from the
Packer-PBL side. It is also recognition that had the deal included PBL paying
cash (which it can do very easily), then shareholder opposition would have been
quite vocal. In this present structure there will not be any trouble in getting
this related party transaction through PBL shareholders early next year.

Involving WAN is the strategic side of the deal. It could
very well choke off any further moves back to the deal table between WAN and Fairfax.
Silly Fred Hilmer should have sown up the deal both parties wanted earlier this
year.

By throwing their lot in with Packer on an important deal,
means WAN is all but lost of the Darling Park Ditherers on the Fairfax
board.

WAN is now an outrider to the First Family of Australian
Media.

It is a big favour WAN has done for the Packers. It has
helped Cons Press exit a poorly structured and thought out transaction that
could only be justified by the streaker’s defence”it was a good idea at
the time’.

With WAN now onside and part of the ‘family’ it means a less
inquisitive media (WAN is the media in Perth)
for PBL’s $700 million new buy, Burswood Casino.

WAN is one media outlet that doesn’t confuse its corporate
and media responsibilities. They are one and the same.

There will be the same amount of critical coverage of
gambling and its problems in the West Australian as there is in the PBL media
outlets, the Nine Network and the ACP magazines group. Virtually none except
when its puff piece for Crown or for Betfair, or a generic piece that looks at
gambling as an industry without pointing to the problems it causes.

And finally movies in cinemas are not the market’s idea of a
growth sector. Figures issued with the PBL statement as back ground show the
Australian cinema market is very much an under performer compared to Asia
and the rest of the global movie market.

Hoyts is No 2 to Amalgamated Holdings Greater Union group in
the number of complexes and screens around the country. Amalgamated Holdings
and the Village Roadshow group are very big in DVDs in this country.

The background figures also reveal that it has a one per
cent market share in the movie distribution business which includes the booming
DVD business, yes one per cent, which is derisory and the real mark of just how
poorly the Packers managed the Hoyts business.

The fact that the Nine Network has been using Sony to
produce many of its DVDs emphasises the lack of any synergies or grasp of
technological change in the private empire of the Packers.

Hence John Alexander’s rejection in the joint statement of
the idea that DVDs posed a threat to the cinema business.

He would say that, wouldn’t he? After all he is proposing to
handover to the Packer’s $173.5 million worth of PBL shares to the controlling
Packer family.

JA is someone who knows the right tune to sing when it’s
required.