According to The Australian media writer Darren Davidson, Fairfax is in secret negotiations to buy Channel Ten. Pity no one has told the sharemarket — Ten’s share price, which closed at 20.5 cents on Friday after peaking at 22 cents, tells us that no deal is in the offing.
At that level Ten is valued at just over $500 million. It is selling at a huge discount to its assets of $719 million (after the latest write-down). The shares are up 7.7% from the all-time low of 18 cents on Thursday, when the result was released. But for any deal to happen, there would have to be upside to buying Ten, and there just isn’t. At the moment to generate the sort of profits Seven and Nine are getting, Ten would have to boost revenue by 10% a year for the next couple of years, while continuing to cut costs and holding them at just under $600 million. In the current sluggish TV market, that is impossible. Next year it has to pay $10 million for the first year payment for the V8 Supercars, and if it wants to bid for the AFL (with Foxtel) it will have to find upwards of $50 million a year or more, even if Foxtel/Fox Sports put up most of the money.
Ten is a basket case, and that means the quartet of billionaires on the board (Gina Rinehart, Bruce Gordon, Lachlan Murdoch and James Packer) are stuck with no prospect of anyone taking them out. Any bidder would have to renegotiate the $200 million revolving credit from the Commonwealth Bank, because if it is not paid in 2017 (and the interest is being capitalised), Gordon, Packer and Murdoch will pay for and increase their stake in the company. Seeing they are already down a couple of hundred million dollars, they won’t want to add to these already huge losses. On top of that a new bidder would have to inject a couple of hundred million dollars in new finance for programming over a couple of years. All of this with no prospect of a payoff. Fairfax doesn’t have that sort of money. The market would punish Fairfax by selling down the shares. It is seen as primarily as an online property play, with some dead tree assets attached and weak radio assets. Buying Ten would destroy Fairfax.
But there are profits inside the faltering network, despite the $168 million loss (including a $79 million TV loss) announced last week. The financial accounts for 2013-14 reveal that a dividend of $3.3 million was paid to CBS Studios in June, “which represents their share of ElevenCo Pty Ltd half-year 2013 net profit”. That was after a dividend of $3.6 million was paid to CBS for “their share of ElevenCo Pty Ltd 2013 net profit” on December 19, 2013. But it’s not the first such payments. The 2012-13 financial accounts reveal that dividends of $3.6 million and $8.6 million were paid to CBS for ElevenCo in June 2013 and December 2012 respectively.
That tells us that ElevenCo, which operates the Eleven digital channel in Ten’s line-up, is profitable, but that profitability is declining, like so much of Ten’s operations.
“Ten management and board are not very confident about the network returning to profit this financial year, and if it does so, it will be tiny.”
CBS owns a third of ElevenCo, so the channel has at least been making a profit in the past two years. The $8.6 million paid in December 2012 tells us ElevenCo had a profit of just over $25 million. But in the next year, that had fallen to just under $20 million, which are profits, unlike the rest of the network. But whether those profits would be there in the event of a takeover is problematic, given shareholder agreements have change of control provisions, which can change the ownership of the assets involved.
The accounts for 2013-14 also underline the network’s parlous financial state. Ten said at the end of its financial year on August 31 it had $30.7 million in tax losses available, but it couldn’t use those funds because it needed to earn profits.
“The directors consider it prudent not to record these tax losses as their utilisation is not expected in the short term. However they will remain available indefinitely for offset against taxable profits,” say the accounts. That’s the Ten directors telling us the company is not expected to make a profit “in the short term”.
That view is supported by analysis of the company’s income and costs.
TV revenue was $601 million in the year to August, while TV costs were $681 million. Ten says it is looking to cut costs by 8% in the 2015 year. That would take costs back to where they were in 2012-13 (Ten said costs rose 8% in the 2014 year because of the Big Bash, the Winter Olympics and Commonwealth Games. The latter two had costs of $55 million. That was a waste of money for the weak ratings and ad revenues written against those costs).
Lifting revenues by 4% for the year would take it back to around $630 million, short of the $636 million in the 2013 year and probably not enough to generate a profit.
The $52 million impairment of the value of the TV licence also tells us that Ten management and board are not very confident about the network returning to profit this financial year, and if it does so, it will be tiny.
This sort of background makes it very hard to believe that Ten will be the subject of takeover activity. There is no fat left in the company.