On Friday, 99.95% of PBL shareholders voted to approve of the company being split into Consolidated Media Holdings and Crown. After the demerger, James Packer’s Consolidated Press retains 38.4% stakes in both vehicles.
Cynics will suggest that the demerger is another means for Packer junior to carefully and slowly cut all ties with PBL’s faltering television assets. Packer found his patsy (strangely, in the form of the usually shrewd CVC Asia Pacific), who bought 75% of PBL’s interest in Nine. After the demerger, Packer’s holding in the media company will be less than ten percent. While his father may not have approved, Packer’s decision to extricate a large portion of his wealth from Nine showed great foresight. Nine’s programming continues to be weak, and profitability doesn’t look like improving in the near future.
Packer noted to PBL shareholders last Friday that “part of the reason that the board unanimously is recommending [the demerger] proposal is we believe it will result in higher share prices going forward, not lower share prices.” Independent Expert, KPMG, agreed, stating that “the creation of two separately listed entities is likely to result in greater transparency… which will, in turn, increase the likelihood if a more efficient value assessment by the market.”
Packer may very well be correct – given the nature of PBL’s diverging businesses, it makes sense to have gambling and entertainment/media split. It is however interesting to observe the willingness of PBL to demerge, compared with the spate of other companies seeking to do the opposite in order to extract “synergistic benefits”. As with any corporate action, the big winner here will be the executives and advisers.
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It has been widely reported that former PBL chief, John Alexander, the man many, including Gerald Stone, blame for “killing” Channel Nine, will collect $15 million for his reduced role (Alexander isn’t exactly lining up at Centrelink though — he will continue to be paid $3 million a year as an executive of CMH and Crown). Former SMH editor and Optus executive, Chris Anderson, collects a more sedate $5 million.
Financial adviser, UBS, would have earned around $3 million for their advice on the deal (the scheme booklet doesn’t specify exactly what UBS was paid, but did note that transaction costs (not including redundancies) are $33 million).
It seems somewhat strange, given the number of smart people who work in finance, that no-one is able to work out whether it is preferable to spin off companies to “unlock value”, or combine companies to “obtain synergistic benefits”. Some submit that virtually all deals, be they takeovers, splits or spin-offs, are devised by investment bankers, who make money on the transaction, any transaction, regardless of the long-term gain achieved by shareholders.
The Scheme Booklet notes that the disadvantages for the demerger included reduction in size, lower index weighting and hefty transaction costs. However, while the Independent Expert’s report (prepared by KPMG) claims “demerged entities may lose some of the benefits of operating as a larger group” KPMG then forecasts that cost savings are actually one of the benefits of the split. KPMG noted that corporate costs are expected to drop from $93 million at PBL, to only $41 million total for both new entities. Based in PBL’s price earnings ratio and the Expert’s calculations, the synergies created by the split will be worth around $1 billion.
If PBL is able to slash corporate costs by de-merging, one wonders how other companies are able to slash costs by merging. They can’t both be right.
PBL returns have been mixed in recent years, rising from around $10.00 in 1999 to $19.55 last week after the demerger was approved, amounting to a gain of around 12% annually. By contrast, the All Ords rose by 16.7% annually during that period and PBL’s television rival Seven, has risen by 18.9% per year.