According to media reports, investment bank UBS is advising PBL about the possible sale of its media assets and UBS has established a “data room” for interested parties to drop in and spin the wheel to see if their card comes up as a lucky candidate to pay James Packer a large amount of money for his “old” media assets.

But with Chris Mackay, the former head of UBS investment banking, a PBL director, shouldn’t the broking arm of UBS be at least acknowledging these links?

UBS Securities, the broking arm of UBS, issued a bullish valuation of PBL today to clients. Curiously the report mentioned press discussion of sales and made no mention of Monday’s statement from PBL confirming that it was reviewing its options. That was made at 9.40am. PBL shares were in a trading halt this morning awaiting anannouncement.

Here’s the UBS commentary:

In the past, when a break-up of PBL had been mooted, we have been unresponsive to the scenario based on (1.) a view that the current share price did not significantly undervalue the asset base; (2.) a view that in a highly regulated industry like gaming, we considered it useful for PBL to retain the media/gaming mix and (3.) as PBL diversified its gaming interests into higher risk territories, when compared with Australia, PBL’s $13b market cap diluted much of the risk associated with these investments.

The expected change to the media rules has again opened this subject up for debate with, in particular, the removal of the foreign media ownership rules roviding more sale options for PBL’s media assets.

We would argue that there is more potential option value in PBL today than there has been for some time, particularly on the Gaming side with Macau and the UK, and potentially Russia and Singapore. Moreover, we expect PBL will actively continue to assess options in other countries, particularly those undergoing regulatory change.

A sale of the more mature media assets would give PBL the flexibility to pursue these other options. However, if this is the primary motivating factor, we would expect there must be some additional larger-sized opportunities for PBL, as we believe that the group’s current balance sheet is comfortably strong enough to fund the already announced plans.

Our sum of the parts is shown below. What we have not factored in, under any sale of Nine-plus scenario, is the capital gains tax implications for PBL. We expect these could be significant, and believe they could result in the proposal of a far more complex structure than has, to date, been speculated.

There are two key areas of upside to our valuation currently, albeit clearly any success in new gaming markets may extend this list somewhat.

Firstly, a private equity scenario for the ungeared media assets [Nine, ACP, ninemsn and UK Magazines] could be calculated to provide an IRR of ~20% at prices comfortably in excess of our current $5.5b valuation. We estimate a price as high as $6.5b could be justified based on what we view as achievable metrics for this scenario. However, part of this valuation upside would likely be offset by capital gains tax issues associated with the sale.

Secondly, there remains potential upside to our Macau valuation. We currently value PBL’s Macau joint venture as a 10x multiple of 2010E EBITDA, less debt [which we expect will peak at around US$2b] and discounted back at 15% per year. This totals $4.5b on an ’07E basis, PBL’s share being half. By contrast, based on the latest Melco share price of HK$17.08, we estimate the implied market value of the JV is around $7b, with the difference equating to around $2 per PBL share.

We expect there would be significant capital gains tax implications associated with any sale, particularly of Nine, which was acquired in July 1990 for $200m. As per the group’s 2006 accounts, PBL has a potential capital gains tax benefit, we assume relating principally to OneTel, of $138m, which would clearly be more than offset by any capital gain. We expect this would be a significant consideration in any deal were to PBL propose.

If the end game were to privatise the Gaming assets, as has also been suggested in various press articles [AFR, 16th October], it is not inconceivable that a sale of all of PBL, accompanied by an agreement by the purchaser to sell the gaming assets back to CPH, could create a more attractive tax outcome, but confirmation and quantification of this from an external perspective is not possible at this stage.

Peter Fray

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