The Ten Network’s attempts to raise up to $90 million in an issue of 120 million shares at 75 cents raises more questions than the announcement answers.

In the wake of the nervousness about the Ten issue, Fairfax shares hit a new low this morning, trading under $1 a share for the first time in years and hitting a low of 97 cents. They were at 98.5 cents just before midday. The shares had hit a previous all time low of $1.045 yesterday. Its shares are down around 70 cents, or more than 40%, since the start of the year.

Regional publisher and Fairfax rival in New Zealand, APN News and Media, also hit a new low in trading this morning of %1.185 a share. They bounced in late morning dealings to around $1.255 a share just before noon.

With Ten on the nose with every major broker, including its book builder, Citigroup, which values the company at 46 cents a share against the suggested issue price of 75 cents, why proceed with an issue that’s bound to fall on its face?

Citi’s valuation will fall if the issue is successful: “We currently value Ten at $0.46 using DCF. Assuming a 120m share issue we value Ten at $0.41c per share.” (DCF means discounted cashflow).

That’s hardly the most ringing of endorsements to an issue from across the Chinese Walls at Citi at 75 cents a share. (But it probably proves that in this case, the Chinese Walls at Citi work. They has been some doubts about this in the recent past).

Ten has given itself an out by saying that it won’t proceed with the issue if it can’t get the price and amount it wants.

After Ten’s earnings downgrade for 2009 and almost 4150 million in write-downs, some analysts reckon it needs more than $90 million.

The Canadian parent, Canwest, can’t afford to continue $51 million or so to keep up its 56.6% stake in Ten, so it will be diluted to around 50%. But Ten is hamstrung by that because Canwest can’t let its holding in Ten be diluted any further. To allow that would see it forced to deconsolidate Ten from its accounts in Canada, which would in turn trigger breaches of its loan covenants. Canwest has already warned that it could breach those covenants in other areas, such as interest cover and cashflow.

To allow Ten to raise a more credible amount, say upwards of $130 million, would see Canwest’s stake fall to around 40%.

Will Bruce Gordon’s Win Corp put up its 13%, or nearly $12 million at 75 cents a share? That’s problematic when he’s already thrown good millions after bad Ten shares for no apparent return.

Ten can’t possibly think it will raise money at 75 cents a share, not with the shares at 93 cents a share, and analysts valuing it at 33 cents (Macquarie, 46 cents, Citi, 85 cents, UBS). Most analysts have a sell, some have a “conviction sell” which means, don’t go near it.

So what happens if the deal falls over?

Well, Ten needs the cash, so do the same bunch of loyal helpers who saved it before in the mid 1990s appear on the scene, bearing bank cheques once again: the likes of Laurence Freedman, Jack Cowin, John Singleton et al.? After all, Canwest can’t join the posse and help bailout Ten a second time. It’s looking for its own gang of white hats to ride to its rescue in Winnipeg.

It’s a thought doing the rounds of the TV industry today. It’s also a thought not dismissed by analysts who can’t see any point to the issue.

Merrill Lynch said this morning in a client note:

Whilst Ten is taking small steps to reduce debt, our view remains that the stock will struggle to outperform as the market focuses on top line growth. We see TEN’s revenues being affected adversely by soft ratings, risks around the 100+ hours of replacement programming for Big Brother, and a tough TV ad market (BAS-MLe -10% for CY09).

Whilst we have factored in the announced $90m equity raising into our forecasts, we acknowledge there are risks the raising is not successful. The main questions in investors’ minds is whether the magnitude will be sufficient to shore up Ten’s balance sheet in the face of expectations of a very severe, protracted advertising downturn, or whether a further dividend cut (payout recently cut from 100% to 40%) or equity raising will be needed down the track.

Post equity raising, Ten’s forecast gearing is more reasonable in our view, with gross debt/EBITDA of 4.0x for FY09E and 4.3x for FY10E), although very close to its 4.0-4.5x covenant. Note that EBITDA would have to fall to <$116m before breaching any covenants, only modestly below our $120m FY10 estimate.

Macquarie said this morning, “Ten will struggle in a deteriorating advertising market as both television and outdoor are heavy cyclical businesses. Ten is mostly reliant on its TV earnings with the platform not only facing cyclical but also structural issues. Trading on an FY09E PER of ~20x, the stock is expensive.”

Peter Fray

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