The Australian Financial Review has yet another entrant in what is looking increasingly like a Melbourne Cup field of possible tyre-kickers for the staggering Ten network. This time it’s Discovery Communications, teaming up with Foxtel.
But will Discovery be a stayer in this race? Earlier this year the AFR and The Australian also trotted out UK commercial TV network ITV as a possible contender at Ten, as well as Anchorage Capital of the US last month. Fairfax Media talked to Ten, but nothing came of it, with this morning’s AFR story firmly making the point that Fairfax “had no intention of taking a stake in Ten”. If Fairfax won’t spend its hard-earned money, the question arises, why would anyone else, apart from Foxtel? Well, Foxtel is controlled 50% by News Corp Australia, which also has management control. And Lachlan Murdoch is co-chair of News Corp, which is 39% controlled by the Murdoch clan.
The AFR reported yesterday that:
“US cable television giant Discovery Communications is weighing up a joint bid for the struggling Ten Network Holdings with local pay TV monopoly Foxtel. Sources close to the negotiations confirmed Discovery — the $US22 billion ($25 billion) entertainment company, which started in 1985 as the Discovery Channel, is considering a joint bid that would give Foxtel a 14.9 per cent stake in the third-ranked commercial broadcaster.”
Dig a little deeper and you find some tantalising ownership links in Discovery. It is controlled by the Newhouse Family of the US through their main media company, Advance. The Newhouses of course own the biggest names in the magazine world, Vogue, Vanity Fair, The New Yorker and other mags, plus a string of mid-level newspapers across the US northeast and midwest. They own around 31% of Discovery, but John Malone’s Liberty Media owns 29% and is generally assumed to be the driving force in Discovery. In fact earlier this year he indicated that Discovery’s CEO, David Zaslav, could vote his US$500 million plus worth of shares in the company, and have first crack at buying them if they became available either normally or through the death of Malone.
Malone and the Murdochs, especially Rupert, are old antagonists. John Malone made himself not only richer, but a more powerful force in the global media business by greenmailing Rupert Murdoch while the latter was in the process of moving News Corp’s domicile from Australia to the US a decade ago. Malone managed to snaffle around 18% of the voting shares of News, which was very close to the Murdoch holding and only sold out in exchange for control of DirecTV, cash and some cable networks in the US. DirecTV was sold and Malone used the cash to grow his Liberty empire which now consists of three companies: Liberty Global, for outside the US (control of Virgin Media in the UK, European cable TV networks and a big stake in ITV bought from BSkyB earlier this year), Liberty Media inside the US (for example the Discovery Communications stake) and Liberty Interactive. The CEO of Virgin Media is Tom Mockridge, a former senior executive of Foxtel, Sky Italia and News International. He would be able to tell Malone and Discovery if buying Ten was worth all the pain and trouble, and the strengths and weaknesses of Foxtel, which is currently revamping its Pay TV offering to try and remarket itself as a lower cost media offer.
With this background of interaction with the Murdochs, you’d have to wonder if Discovery would do Lachlan Murdoch (Ten’s former chairman and the one person most responsible for the network’s woes) any favours. Discovery would have to put up most of the money. Foxtel’s contribution would effectively be financed by its owners, Telstra and News Corp. News Corp has management control of Foxtel, so in effect it would dominate Ten, but Discovery likes to have its own people running its media investments, which would not go down well with News Corp here or at head office in the US.
The big problem is the $200 million revolving credit from the Commonwealth bank, which either has to be repaid by the bidder/s or by Ten. The latter is impossible; Ten is broke. James Packer, Lachlan Murdoch and Bruce Gordon have guaranteed that credit line in return for more shares in Ten. Either way the final cost will be well over $1 billion, which is far too much for a network with no earnings growth potential whatsoever. And then there’s at least $200 million more to seed new program development costs over a period of years — all while the media markets are fragmenting and streaming video is assuming greater importance for consumers.
In fact the growing number of suitors for Ten could be a storyline in The Young and the Restless. But the fact that Fairfax doesn’t want to waste its valuable capital, and that the US private equity firms haven’t rushed in with a bear hug bid, tells us that Ten is a very poisoned chalice for any would-be victor. Ten is unsaleable and the share price reflected this reality by not moving. It finished unchanged yesterday on 21.5 cents. Even the day traders have heard this “Bid for Ten looms” rubbish before and refuse to be spooked by it. Follow the Ten share price: it will tell us one day if there’s to be a bid, well before the ASX and shareholders are officially informed.