What’s going on at UBS and its fabled reach into the bowels of The Australian Financial Review?

The paper reported on page 1 this morning, and in its Street Talk column, that UBS head honcho Matthew Grounds had gone to Telstra earlier this year and tried to convince it to buy Seven West Media (despite it being controlled by Kerry Stokes).

Telstra said no, as any sensible company would when a fee merchant comes calling, trying to sell a deal involving an old-line media company.

The paper said Grounds “is believed not to have been mandated to sell Seven”, and the meeting with Telstra “was not believed to have been under instructions from Seven”. So what was he doing? And did the AFR report that right?

So, what are we to make of that tale and the news from Seven this morning that Seven West Media is going to convert the troublesome $250 million of converting preference shares into ordinary shares and make a separate issue to shareholders on a pro rata basis? This will raise much-needed capital into the bargain, with the $150 million issue to be underwritten by non other than UBS.

The preference shares have to be unwound because they have a very high conversion price well above the current Seven West shares of $1.36 — the conversion price is believed to be more than $6 a share.

They were issued as part of the $4.1 billion merger of Seven and West Australian newspapers back in 2011, the deal that consolidated the media interest of Kerry Stokes.

The convertible preference shares were held by Stokes’ main company, Seven Group Holdings, and an equal 20% of Seven West’s capital, meaning Stokes had effective control over 55% of Seven West.

In the complex deal, Seven said it would issue 489,719,181 new shares at $1.25 each in the pro rata non-renounceable issue to all shareholders apart from Seven Group Holdings, which already controls 35% of Seven West Media.

The 2500 convertible preference shares will be converted to 265,749,590 new shares in Seven West Media at $1.28 a share. Those shares are equal to Seven group’s 35% stake in the rights issue.

The deal is structured to limit the ability of Seven Group from increasing its stake in Seven West Media (which it would have done if it had taken up the shares in the non-renounceable offer).

But Seven’s documents for the special shareholders meeting on June 2, which will vote on the deal, points out that Seven Group could still increase its stake to around 45% if there is a shortfall on the rights issue.

“SGH currently has a shareholding of approximately 35% in Seven West Media and following completion of the Proposed Transaction, could increase its shareholding to a maximum of 45% (depending on the take-up under the Pro-rata Offer). If all shareholders take up their full entitlement under the Pro-rata Offer, SGH will retain its current 35% shareholding.,” Seven West said in its statement this morning.

The convertible preferences had to be redeemed by April 20, 2016, otherwise Seven West would have been blocked from paying a dividend (Crikey pointed out the problem back in February of returning capital until the preference shares have been redeemed, repurchased or exchanged).

So why was Grounds asking Telstra about a takeover offer if there was a rights issue in the offing?

Peter Fray

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