David Gyngell, Nine Entertainment’s $5 million-a-year chief executive, is certainly racking up the bills out Willoughby way. Nine’s paying $100 million a year for NRL, $50 million a year for cricket and tens of millions more for shows such as Australia’s Got Talent … and now $340 million to buy the Nine affiliate stations in Adelaide and Perth. Meanwhile, it has lost several million a year from the stupid Tom Waterhouse advertising deal, which was actually brokered by Gyngell in the first place.
Those connected in television land still remember his ridiculous claim about Nine being “debt free” when he walked out triumphantly to announce Nine’s new ownership structure back in October. How “debt free” is now there for all to see. Nine was already in the hole for $700 million or so when the restructure occurred, and now it has chalked up $340 million in debt to buy Adelaide and Perth.
Why is it taking on even more debt? The story doing the rounds is Nine decided to buy up Adelaide and Perth when Cricket Australia was seriously considering granting the rights to the Ten Network. Nine was at the precipice of losing the rights to Test cricket because it could not guarantee national coverage — the owner of Adelaide and Perth, Bruce Gordon, wasn’t prepared to give Gyngell any long-term commitment.
Why? Gordon was angry because of Gyngell’s earlier exploration of a $4 billion merger with Southern Cross at the expense of Gordon’s WIN regional network. Despite his protestations there was no ill feeling about Gyngell’s idea of merging with Southern Cross, Gordon, owner of the WIN regional television network and a major investor in and director of Ten, was annoyed and angry with Gyngell.
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Gordon had no warning from Gyngell about the discussions he was having with Southern Cross, and Gordon was concerned his WIN regional television network as well as his investment in Adelaide and Perth could end up being seriously diluted — he feared he would be stranded on the dance floor with no partner.
Gordon knew his trump card, though, was Perth. He knew Gyngell was having trouble batting away the Ten bid for the Cricket Australia rights because of Cricket Australia’s demand that Nine guarantee national capital city coverage of the cricket Tests for the life of the new agreement. Any Nine merger with Southern Cross couldn’t deliver that guarantee, because Southern Cross does not operate in the Perth market.
So began detailed discussions about the future ownership of the Adelaide and Perth television stations. Gyngell was left with only one option: Nine had to buy Adelaide and Perth and at Gordon’s price. It was only a matter of time before Gyngell caved in and agreed to pay a very healthy 9.5 times earnings for the two worst-performing capital city television operations in the country.
The agreement had longer-reaching consequences: it will probably result in a change to legislation ending the 75% reach rule for metropolitan television stations. Thus far Seven and Ten have been loath to support a change to the 75% rule — why pay good money to acquire an asset that is using your content already and paying for the privilege? But the new government will likely change the rule, and Gordon is certainly driving that agenda now as he positions himself to offer up the WIN regional network to either Nine or Ten.
“The gamble for Nine’s owners is: can Adelaide and Perth deliver an increase in national audience share under Gyngell’s stewardship?”
All of a sudden Gordon’s WIN network is sought after, because Ten would probably prefer a merger with WIN than Southern Cross, which means Nine will face another price war if it wants to maintain its association with WIN. The only winners out of this will be the owners of regional networks, something not lost on Kerry Stokes and the billionaire board members of Ten — James Packer, Lachlan Murdoch and Gina Rinehart — who will all have to stump up more cash to buy regional businesses.
What seems to have been ignored in all of this is Nine Entertainment has now given up the affiliate fees it was charging Adelaide and Perth. Like the affiliate agreement Seven enjoys with Prime and Ten with Southern Cross, Nine was charging Adelaide and Perth something like 30% of the income those stations generated as an affiliate fee. Perth and Adelaide generate income around $150 million a year, so that’s $45 million plus of affiliate fees Nine will no longer enjoy.
Nine’s purchase price was based upon a 9.5 times earnings, which means if Adelaide and Perth were achieving earnings before interest, tax, depreciation and amortisation of, say, $35 million a year (an ambitious estimate), it means there is a $10 million cash hole, putting to one side Nine now being able to use accounting procedures to spread programming costs across five stations rather than three.
Both Perth and Adelaide have been black holes for Nine for a long time when it comes to ratings. Under Gordon’s stewardship, the Perth and Adelaide operations have suffered innumerable cuts to their operating budgets in news and marketing. But the suite of programs aired by these two stations were and are sourced from Nine anyway, so the only area Gyngell can try and lift ratings is in local news backed by an expensive and unrelenting marketing campaign. This of itself won’t make a huge difference in these markets because AFL-mad Adelaide and Perth will stick to Seven like glue.
The Gyngell theory is a one percentage point lift in national audience share equates to about $70 million nationally of additional annual income. Content, no matter the cost, is his mantra, which remains one of the key reasons Nine continues to perform very poorly in terms of the margin of profit it generates from revenue turnover.
The gamble for Nine’s owners is: can Adelaide and Perth deliver an increase in national audience share under Gyngell’s stewardship? Only time will tell, but history tells us any change in viewer habits takes a long time, and the flow-on revenue benefit has an even longer tail.
In the end, all of this means a continued flat profit performance for Nine despite the heavy investment in new programs and assets, and this will only increase the pressure as the American hedge fund owners look to how they can generate a meaningful return by either selling the business to someone else or floating it.
Remember Nine enjoyed much of its ratings improvement over the last 12 months because of the poor performance from Ten. That is not a scenario likely to be repeated in the coming 12 months.
More costs at Nine, a more resilient Ten and a vengeful Gordon is what Nine and Gyngell can look forward to down the track.