Kerry Stokes is poised to take a controlling 50%-plus stake in the Seven Network Ltd at a time when the company has lost more than $40 million on controversial stockmarket investments, and earnings are under increasing pressure.
The size of the buyback, 20% of the Seven Network’s listed capital of 206 million shares, indicates the determination of Mr Stokes and fellow directors to prevent the company’s share price from being hammered as it continues to lose money on $715 million of stockmarket investments (early 2008 prices) that are now bleeding value, and with a downturn in TV ad revenue and earnings expected in the coming year.
Mr Stokes made a rare appearance at Seven’s results briefing in Sydney this morning. It was brought forward three weeks because of the Olympic Games. Mr Stokes said he was there because he and other board members and executives were leaving for Beijing over the next day. He told the briefing that his private company would not reveal its attitude to the buyback. He said the company, Australian Capital Equity, did not sell into the 2008 buyback.
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The company reported lower earnings from its TV business (which is in the half-owned Seven Media Group with private equity group KKR) but a standout result for the joint venture’s magazines business, Pacific, which scored solid gains.
But the benchmark TV business suffered a loss of second half earnings and profit margins as ad revenues turned down and the Nine Network made ratings gains at Seven’s expense. The company’s gross margin in TV fell from 33% in the first half of the year to 28% for the full year.
To support the faltering share price, which has fallen from more than $14 to just over $7 in the past year, and closed at $8.14 on Monday, the company has doubled the size of a share buyback from 10% in the year to June 30, to almost 20% this financial year.
Seven shares rose 37 cents in early trading this morning to $8.51 as investors liked the buyback, which was the whole aim of the exercise, just as it was a year ago; and just as the Ten Network did five weeks ago to put a line under its collapsing share price.
The new buyback will see the company buying back up to 40 million shares if approval comes at a special shareholders meeting next month at which Kerry Stokes can’t vote.
Mr Stokes’ holding in Seven Network has risen from around 42% to about 45% thanks to the 2008 buyback and if Seven buys all the shares, it will move over 50%. Even if Seven only buys half the 40 million shares, Mr Stokes will be very close to a controlling 50.01% stake, all without paying a premium for control.
The net $41.9 million in significant losses came mainly from the written down value of its holdings in technology group Engin and in the contractor, GRD. There was no loss taken against the 20% stake in West Australian Newspapers where Seven is trying to get board representation. That’s despite paying an average price closer to $11 a share than the current WAN price of $8.81 this morning.
Seven reported a fall in bottom line annual profit but claimed its underlying earnings are strong with core television revenue outpacing overall market growth. Net profit before significant items was $170.653 million, down 2.2%. But it said Seven Media Group’s annual earnings before interest, tax, depreciation and amortisation (EBITDA) was $398 million, up 5% from $380 million.
Seven Network’s share of the joint venture profit in Seven Media Group was $54 million. The magazine business Pacific Magazines, which holds titles like New Idea and Better Homes and Gardens, posted EBITDA of $61 million and an EBIT of $46 million, up from around $39 million in 2007. Seven declared a final dividend of 17 cents, taking the total for the year to 34 cents, up from 29 cents in the fiscal 2007 year. That higher dividend will help Mr Stokes enjoy life a bit more.