They won’t reject the deal, but non-Kerry Stokes shareholders in West Australian Newspapers should because of last year’s Stokes shuffle, the merger of Seven Network and WesTrac to create Seven Group Holdings, and the promises made in the documentation from Seven Network independent directors.

That deal was built on one need only, Kerry Stokes’ need to find cash (not his own). His company, WesTrac was short of cash (about $600 million) to repay bank loans, Seven Network Ltd had the cash — about $1 billion. He had 48% of Seven Network, so non-Stokes shareholders were made an offer they subsequently accepted, along with all the assurances given in the documents for the deal and at the scheme of arrangement meetings.

And what has happened less than a year later? Kerry Stokes has the need for more cash for another deal. He won’t or can’t meet the $700-plus million cost of it, so he settles on the undergeared balance sheet of West Australian Newspapers (he owns 24%), which he wants to access to allow his latest self-enriching deal to take place.

The non-Stokes shareholders in WAN should understand this simple point: there will be only one winner from this deal and that’s Kerry Stokes, just as there was only one winner from last year’s deal.

But non-Stokes shareholders in WAN should be alert to the fact that they control the fate of the deal and shouldn’t let go without a fight and a lot more on the table. They own about 76% of WAN and Stokes can’t vote his 24% holding. Under the Stokes proposal, WAN shareholders will have to cough up a lot of money to avoid being diluted because the proposal will see about $1 billion of shares being issued, with a further $2.5 billion being borrowed.

WAN will go from being undergeared and a sleepy Perth-based newspaper company, to being the new version of Seven Media Group (SMG), with a small amount of equity and a huge debt burden. And it’s all to benefit one person, the minority shareholder who has affective control of the board and management of the company with just 24%. WAN will have the balance sheet of a company owned by private equity, but in the public arena.

In effect, Stokes is taking the SMG (and its huge debt burden) from the private joint venture with US buyout group KKR (with SMG executives owning about 6%, will that be cashed out in the deal?) and backing it into the listed WAN.

Why, because KKR wants out and Stokes doesn’t want to pay the $700 million-plus buyout fee directly, or can’t. So he has to find another way and it’s the 76% of WAN shareholders (aka bunnies) who will effectively pay.

If WAN raises $1 billion in new equity, Stokes’ bill of $240 million is more easily fundable than the more than $700-plus million that would be required to buy out KKR under a shareholders agreement.

In considering this, non-Stokes shareholders in WAN (and everyone else), should remember what non-Stokes shareholders in Seven Network Ltd (52% of the issued shares) were told last year in the bleatings about why the merger with Stokes’ tractor company WesTrac was a good deal.

This is what the-then deputy chairman, Peter Ritchie, wrote in a covering letter for the documentation for the Seven Group Holdings scheme of arrangement proposal last March.

“The new entity, Seven Group Holdings Limited (SGH), will be a significant Australian diversified operating and investment group. SGH will have market leading businesses and investments with strong revenues and earnings, an attractive growth outlook and will allow Seven to deploy part of its cash reserves in a business with attractive growth prospects.

“As shareholders in SGH, Seven shareholders will maintain exposure to Seven’s media assets, while gaining exposure to the operating business of WesTrac Group, which is leveraged to the mining and construction industries in some of the world’s fastest-growing economies and is expected to generate significant growth.”

And less than a year later, what do we have? No growth, no maintaining “exposure to Seven’s media assets” if the shuffle to WAN happens. At best that “exposure” will be indirect. And there will be a monstrous debt as well in WAN, which will crimp its profitability.

And from Kerry Stokes, chairman of his main private company, Australian Capital Equity (the vendor of WesTrac), this guff in the same scheme documentation of March last year.

“An investment in SGH will provide Seven Shareholders with ongoing exposure to all of Seven’s existing investments, including Seven Media Group, West Australian Newspapers Holdings Limited and  Consolidated Media Holdings Limited. In addition, shareholders in SGH will gain exposure to WesTrac Group, an authorised Caterpillar equipment dealer in its Western Australia and New South Wales/ACT service territories, where it has market leading positions.”

The best non-Stokes Seven Group shareholders can hope for (that’s about 34% of the shares) is an indirect holding in Seven’s media assets.

So those Seven Network shareholders who read (and listened at the meetings) and believed these assurances, now find they are no longer operative because Kerry Stokes has a greater imperative.

And then there was this gem of a statement from Stokes in his letter of March, 2010:

“SGH will be ACE’s primary investment for the foreseeable future. For this reason we have asked long-time ACE executive Peter Gammell to serve as chief executive officer of SGH and we have every confidence he will serve all shareholders with distinction.”

So what happens now with the Seven Media assets sold off to WAN (to get rid of KKR)? Stokes now has TWO “primary” investments for ACE to control, and you can bet that Gammell’s responsibility will extend to overseeing those as well, diluting his time at Seven Group Holdings, which should really now be called WesTrac Ltd.

The latest proposal is nothing but a case of shuffle, shuffle, no value added, except for Stokes.

No doubt Stokes and others at Seven Group Holdings will produce a reason or explanation as to why those previously stated strong sentiments from last year no longer apply.

But you have to ask why and for how long does Stokes intend this new structure to survive.

Will he introduce a new shareholder into WAN in the shape of James Packer, in exchange for a divvying up of control of Consolidated Media (22% Stokes) and then grabbing management control of Foxtel and Premier Media Group from News Ltd, with the active support of Telstra? (Remember Kerry Stokes via one or two of his companies built a a large stake in Telstra and is reputed to be the largest individual shareholder in the telco (but just under the 5% disclosure level).

Will Cons Media buy Austar in a leveraged deal with or without Foxtel? Foxtel’s staff journal, The Australian, last week told the world that Foxtel was thinking of making another bid for Austar. News Ltd owns The Australian and has 25% of Foxtel, 50% of Premier Media Group and management control of both.

So is this deal why Kerry Stokes spent six weeks or so in the snowfields of western America? Obviously he had a lot to think about. Did he discuss this deal with James Packer when he entertained his fellow Cons Media shareholder and family in the snow in January? How cosy would that have been.

Two other points: don’t you just love the way Kerry Stokes and his advisers again have duchessed the Australian Financial Review and The Australian (the Fairfax broadsheets look like they were playing catch-up with their reports this morning, or they were given a smaller “drop”) by giving them extensive background and detail about the proposed deal.

This happened in 2010 and Stokes backed it up by giving interviews to various journalists on The Australian and the AFR, and effectively neutered them. The Fairfax broadsheets missed out and were the only media critical of the WesTrac deal.

Another point, what about Seven’s continuous disclosure requirements? The AFR page one report and then the back page comment contains a lot of detail, but also the disclosure that:

“Major institutional shareholders in WAN were sounded out on Thursday and Friday by Seven’s investment advisers, UBS and JP Morgan, to test interest in the capital raising and the proposal which will require WAN shareholder approval”.

Now, whatever happened to continuous disclosure and Seven’s responsibilities? If major shareholders in WAN were being briefed on Thursday and Friday, why not the rest of the market? And continuous disclosure now has considerable force after ASIC won 3-0 in the full Federal Court in its appeal against a Federal Court ruling against it in the Fortescue Metals/Twiggy Forrest disclosure case.

WAN shares hit their 52-week low at the start of February of $6.16, by last Friday they were up to $6.36, a rise of 20 cents. Not much …

And what does the deal mean for Australian media? Nothing, just a shuffle and Kerry Stokes’ control expands because he is removing KKR from the ownership equation.

But in Western Australia, the media will now be controlled by two old men; 70-year-old  Stokes and 83-year-old Bruce Gordon and his WIN company, which owns Nine in Perth plus the WIN TV regional business.  Gordon is Ten’s second biggest shareholder. James Packer, Stokes’s partner in Cons Media, is the biggest holder of Ten shares. Rupert Murdoch, plus Austero and Southern Cross Media (which could merge), are bit players in the West.

The media in Australia’s boomiest state is now in the hands of just two men. Stokes, Murdoch and Gordon share control of Queensland’s media as well, with Fairfax, Ten, the radio networks and the Nine Entertainment company bit players as well.

And finally, you can help appreciate the irony in this commentary on the deal in The Australian this morning;

“So don’t expect Stokes, 70, to sit on his hands if the WAN merger is done. There will be more deals. And more deals means even more related-party transactions as media ownership becomes more concentrated. Seven shareholders are used to these deals, but its independent directors need to be vigilant.”

“Related party transaction?” Well, will or have the independent directors of News Corp been vigilant about just who paid the Murdoch family’s share of the $77 million stamp duty settlement in the ACT, and will there be an independent report if the mooted purchase of Shine from Elizabeth Murdoch and partners happens?

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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