Just say Communications Minister Malcolm Turnbull wins handsomely and the Senate waves through new media ownership reforms, including abolition of the cross-media and audience reach rules. Then what?
In 2006, when then-minister Helen Coonan relaxed media and foreign ownership restrictions, there was an instant frenzy of deals: the sale of channels Nine and Seven to private equity and a News Corporation grab at Fairfax, which merged instead with Rural Press.
A decade later the urge for industry consolidation is more pressing, but it is by no means clear that a rush of mergers and acquisitions would follow deregulation.
Despite a resurgent sharemarket and what feels like the beginning of a cyclical upswing — with retail spending recovering, house prices rising and growth back — the long-term decline in advertising revenues continues unabated. A few weeks ago JP Morgan’s media analysts noted there had been a “soft start” to 2014, with ad sales growth below expectations in digital, low single digits in TV, down strongly in radio and a continuing bloodbath in newspapers and magazines.
Between the likes of News and Fairfax, free-to-air networks Seven, Nine and Ten, regional TV players Win and Prime, and radio operators Nova, Southern Cross Austereo, APN and Macquarie Radio, it’s a 15-way squirrel grip: everybody’s hurting, and no one’s about to pay a premium for a legacy media business, much less telegraph a bid that will only push up the price of the target.
So when Macquarie Radio chairman John Singleton let fly at Fairfax recently, after talks failed to deliver a combination of Macquarie and Fairfax’s radio stations, he said he would “wait ’til they are absolutely fucked and buy it off the receivers”.
Maybe, but it does show among other things how the dynamic of a shrinking industry, as much as regulation of ownership, is putting the brake on takeovers.
It is often passed over, but as Crikey has previously pointed out, for example, some of the oft-mooted takeover deals — News buys Ten, even Seven buys Fairfax (with some asset sales) — could happen already under the existing media ownership restrictions.
These deals have been chewed over, literally, for years, and never eventuated. And they’ve been consistently denied. Early last year, when the relaxation of media ownership laws was first canvassed, under Labor, News said it had “no plans to acquire Channel Ten”, describing speculation to the contrary as “conspiratorial, highly fanciful and wrong”. In December Lachlan Murdoch, who is a director and shareholder of News and chairman and substantial investor in Ten, reportedly told the shareholders association ahead of the annual meeting that if there was a merger of News and Ten he would “eat the table we’re sitting at”.
Additionally, Australian Competition and Consumer Commission chairman Rod Sims has already flagged he would likely oppose any deal between News and Ten, on the same competition grounds — but stronger — used to block Seven’s bid for Consolidated Media Holdings, which owned a quarter-stake in Foxtel and was subsequently bought by News. It is hard to see how Foxtel could be used to bid for Ten, even if half-owner Telstra agreed — it would not ease competition concerns — and even harder to imagine why the NASDAQ-listed 21st Century Fox, about to delist in Australia, would want to turn around and buy an ailing free-to-air network. None of which rules out a News bid for Ten, but does make it seem less than likely.
A deal between Seven West Media — which owns Channel Seven and The West Australian newspaper — and Fairfax would be more complicated, but the two-out-of-three rule could be worked around if there was a disposal of Fairfax’ radio interests and/or some or all of the regional and rural print assets, leaving a strong television business and major metro mastheads in Sydney, Melbourne, Perth and Canberra. But, there was an almost venomous undertone when Seven’s major shareholder and chairman Kerry Stokes told a group of journalists in late 2012:
“We’re not looking at buying Fairfax and there’s no prospect that we would. In regard to their position, they have articulated what they think is their strategy going forward and we watch it with great interest.”
With Fairfax shares more than doubling in the past year and a half, as it cut costs and sold assets to reduce debt, it may well be that the best time for a takeover has come and gone. CCZ media analyst Roger Colman reckons Seven West has been shocked at the steep decline of the West and Pacific Magazines, and anyway the synergies between Seven and Fairfax would be worth “peanuts”.
“The one good thing about the tough times we’ve been through is it strips all the arrogance from the management teams.”
Similarly, Seven’s chief Tim Worner has already indicated the synergies with a bid for Prime are limited and Seven’s six-year affiliation deal has just been concluded. Healthcare billionaire Paul Ramsay voted with his feet a fortnight ago when he sold his “non-core” 30% stake in Prime for $95 million — not to Seven or Stokes, but to a bunch of institutional investors.
Which leaves a resurgent Nine, out of the blocks this year with a 20%-plus jump in its shares to $2.35 lifting it well above the $2.05 float price — although major private equity shareholders Oaktree and Apollo are likely to sell their 36% stake in the short term. Nine is now miraculously touted as a predator after surviving its own near-death experience.
Chief David Gyngell is certainly pushing hard for the opportunity to buy regional affiliate WIN if the 75% audience threshold is lifted, following up on the 2012 acquisition of Nine’s Perth and Adelaide stations. Nine has the rights to a “first look” at WIN, owned privately by billionaire Bruce Gordon, but the price tag may be lower than anybody expects. Nine is driving a tough bargain on affiliate payments and WIN’s negotiating position is not strong. Had WIN chosen to affiliate with Ten — in which Gordon holds a 15% stake — it would have been in deep trouble now, given the network’s ongoing ratings malaise. Colman told Crikey: “Paul Ramsay has just shown Bruce Gordon the way to go — get out.”
Nine is also touted as a bidder for Southern Cross Austereo, which owns the Triple M network and 2Day FM, which just suffered an unprecedented plunge in its share of the Sydney audience from top to bottom of the ladder after the defection of Kyle and Jackie O. 2Day’s ad revenue is likely to follow south. Further, Southern Cross just last year signed a new three-year regional TV affiliate deal with Ten, meaning Nine would likely have to wait until late 2016 to bid.
At the release of Nine’s half-year profit results, Gyngell indicated Nine would be interested in running the rule over metro radio and outdoor advertising assets, which could signal deals with APN — not prevented by the two-out-of-three rule, if the Queensland print assets were sold — or Fairfax (as canvassed in today’s Australian Financial Review), although this is a longer bow.
Gyngell stressed that while Nine had the balance sheet for acquisitions, it would be a disciplined buyer: “You don’t want to go out and pay overs for these things. Most companies are well run on a cost-constraint basis. Of any company you can talk about, not one of them is out of control on costs.”
There is little doubt takeovers are needed. Matt Williams, head of equities at major fund manager Perpetual, is cautious on expectations of a deal frenzy. Perpetual is a substantial investor in both Nine and Prime. Williams confirms Perpetual picked up shares from Ramsay, but says the investment stacked up on its merits and was certainly not made in the expectation of a takeover bid.
“Over the 20 years I’ve been in the market, buying any company with a definite view it will get taken out … it doesn’t happen, you always get it wrong,” he said.
Still, Williams also believes further rationalisation is likely: “The overriding theme is traditional media companies are facing structural challenges that aren’t going away anytime soon, and they’ll be looking for ways to either diversify or expand.”
While he won’t speculate exactly which mergers will play out, fund manager Simon Marais — principal of boutique Allan Gray and a substantial shareholder in Fairfax, Southern Cross Austereo and APN — told Crikey there is no doubt consolidation makes commercial sense. Marais — who says he is well ahead on his investments in Fairfax and Southern Cross, less so on APN — thinks it is too late for investors to get in on any looming activity, now that speculation is rife.
“You want to buy these things when they’re really cheap,” he said, adding: “The one good thing about the tough times we’ve been through is it strips all the arrogance from the management teams.”
If deals are going to get up, everyone’s going to have to give a little.