It’s been two years since former ad man Hamish McLennan became CEO of the Ten Network. Earlier this month, in an interview to commemorate his tenure, he said 2015 had marked the best start to the year since 2012.

“We’re dramatically up on our ratings, we’ve successfully launched a number of new shows and we’re establishing a schedule for all three channels,” McLennan told The Australian

Of course, he would say that. But he’s not the only one. In recent weeks, evidence has suggested things for Ten are actually getting far better. Ratings are up, as is Ten’s share of ad revenue. More importantly, costs are down and forecast to keep falling rapidly into the second half of this financial year. Putting increased revenue and rapidly declining costs together, one industry insider (who’s not from Channel Ten) says there’s no way Ten isn’t in the black, at least on a month-by-month basis.

Ten’s improving position comes at a sensitive point. For several months now we have been told that a succession of would-be suitors were about to do a deal with the Ten Network, and for several months now we have been told (by media reports, not by Ten) that the would-be suitors have folded up their tents and disappeared home. But there is still one would-be suitor left: Foxtel, the 50%-Murdoch-owned pay-TV company, which has been persistently trying to buy 14.9% of Ten for a reported 18 cents a share.

During this time, Ten’s ratings performance — and lately its revenue position — has started looking up. The sharemarket has recognised that improvement with investors, including investment bank Lazard, keeping Ten’s shares above that 18-cent level in day-to-day trading. Yesterday, Ten shares traded at 22.5 cents, half a cent under the 23 cents that several would-be suitors were reportedly offering, and the first price mentioned in a deal with Foxtel.

It seems some shareholders have a view that Ten is worth a fair bit more than 18 cents a share. Despite several statements from Ten over the months confirming talks with unnamed parties, the board had not provided any details of the most reported talks — those with Foxtel — and why the board is persisting with them at 18 cents a share when the share price is well above that. It has also not updated the market on what its improving position means for the deal. It’s a complicated position for Ten’s board, because Foxtel is half-owned by News Corp, which is now chaired in Australia by Lachlan Murdoch. Until recently, Murdoch was chair of Ten, and he remains a major shareholder (in both companies).

Crikey asked Ten this morning why its improving profitability hadn’t been disclosed to the market through a formal update, and what, if anything, its position meant for its negotiations with Foxtel. Ten spokesman Neil Shoebridge said: “We will update the ASX again when required to do so under its continuous disclosure obligations.”

The improvement in Ten’s fortunes is widely acknowledged, though some, like Steve Allen of Fusion Strategy, are cautious. “There’s no question Ten has had good news of late,” Allen told Crikey, noting that Ten’s strategy has, for the first time in years, been consistent under McLennan. And while it’s all off a low base, this is starting to reap dividends. “What we’ve consistently said about Ten for past three to five years is they’ve been in turmoil. They haven’t had a strategy, or rather, they’ve had too many, and have lurched from one to the other.

“It’s clear Ten is slowly returning to being a profitable company … “

“Now there is consistency. Hamish McLennan has stabilised the ship. They are trying to do things a bit differently, and succeeding more often than not with their new ventures, all of which is obviously going to develop more confidence in the marketplace. There’s a more consistent story coming from them, and the ratings are following.”

According to last week’s Standard Media Index data, Ten’s share of metropolitan TV advertising in April rose from 19.3% to 20.3% — a percentage point higher than the equivalent figure in April last year. Total bookings, meanwhile, rose 1.4%. Take those two numbers together, and Ten booked 7.3% more in advertising in April 2015 than it did in April 2014, or, it went from booking in $106.4 million in monthly ad revenues to $113 million in April.

It’s ratings are up, too. In the first 12 survey weeks of this year (to May 2), Ten improved its total audience share — rising from 15.75% at the start of 2014, to 17.90% this year. But the biggest gains have been in prime time, when in the first 12 weeks of the year Ten went from, on average, 209,000 viewers, to 248,000 viewers aged 16 to 54. That’s an 18.7% increase, set against falls of about that magnitude at Seven and Nine. The only station to rise quite as strongly in this part of the year has been SBS.

Ten’s I’m a Celebrity … Get Me Out of Here!, while not necessarily the most well-reviewed programming, did draw a significantly better and larger audience than the show it replaced — a season of The Biggest Loser. “It doubled the ratings,” Allen said. “This is all off a very low, very poor base. But it was a minor hit.” And the figures quoted above are all before the May 5 launch of MasterChef, which in its seventh season has increased its audience on last year and managed to dominate the most-watched programs list in its first two weeks.

This shouldn’t immediately matter. “You can’t monetise ratings automatically. It’ll take a year or more to catch up,” Allen said. “Ten needs to deliver a consistency it hasn’t had for a while — only when they’ve got it can they reap the just rewards, and take their revenue share closer to their audience share. They’ve been underweight for three or four years.”

Analysts measure how well a channel’s share of ratings compares to its share of advertising using something called a “power factor”. If a station’s share of the total TV audience and share of total TV ad revenue are exactly equal, you’d get a power factor of 100%. But if, for example, the proportion of TV viewers who watch Ten is below the proportion of TV ad spend Ten is able to secure, you’d get a figure below 100%. By comparing OzTAM ratings reports with SMI reports, it’s possible to chart Ten’s power factor over time.

From 2004 to 2012, Ten was actually able to charge more per viewer than its rivals (with a power factor between 101% to 111%). That changed in 2013, when the station’s fortunes took a rapid dive. By midway through last year, Ten had a power factor of just 73%. But since that low point, it’s been improving. It’s now up in the high 80s — this month’s SMI data (due out in June) will reveal whether it has continued to strengthen. Some industry insiders are adamant it has, but others, like Allen, say key to raising Ten’s share of advertising will be upcoming negotiations with the major media-buying companies (like GroupM) in June.

Key to this tentative recovery has also been the matter of costs. Ten reduced its cost base dramatically in 2014 and is continuing to do so this year. In its first-half results briefing late last month, Ten revealed it had reduced its cost base by 2.1%. In the full-year, a reduction of 8% is forecast. Part of this is because last year saw significant programming costs that are unlikely to be repeated every year — for example, Ten’s hosting of the Winter Olympics in early 2014, the rights for which reportedly cost it $20 million.

Put all these factors together, and it’s clear Ten is slowly returning to being a profitable company, though thoughts differ on how easy it will be for Ten to maintain the positive momentum.

The big problem for Ten is the revolving debt arrangement with the Commonwealth Bank. That $200 million deal was done at the end of 2013 to give Ten a new source of cash (after major shareholders had been asked twice to approve hundreds of millions of dollars, which were then wasted on failed programming). It is guaranteed by Lachlan Murdoch, James Packer and Bruce Gordon, and any outstanding cash drawn from this revolving credit facility is due in late 2017. Interest on the loan is being capitalised, so the amount owed now tops $212 million, which Ten hasn’t got and has no way of getting, unless the injection of funds from Foxtel and an issue to other shareholders can provide a buffer.

There has also been talk that Ten wants to raise about $70 million to $80 million from other shareholders. A key to this is whether the likes of Murdoch, Packer and Gina Rinehart invest more money in Ten. If they don’t, the issue will fall over and Ten will find it tough to get the amount it wants. But some big investors — hedge funds, for example — might be interested now that Ten’s fortunes seem to be improving, but they will be looking for a quick turn (buying at 18 cents and selling at 23 cents a share). That is not the sort of financial support Ten is looking for, because hedge funds are fickle and could easily start shorting Ten’s shares at the first sign of another stumble, bringing back that sense of crisis.

Clearly Ten’s fortunes are on the rise, and the share price is sending a signal that investors increasingly believe this. So why hasn’t Ten’s board recognised that and pushed up the price of the Foxtel deal to closer to where the market is — say around 22 cents. That would generate $10 million more from any deal. The Foxtel deal is increasingly looking like one between related parties — all centred on the Murdoch family and their key companies here and offshore. Time for the ASX and ASIC to ask just what is going on?

Peter Fray

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Peter Fray
Editor-in-chief of Crikey