The account tidying is well underway at Foxtel with the repayment of a near AU$1 billion dollar shareholder loan ahead of the takeover of Fox Sports and purchase of 15% of the pay TV business from shareholder Telstra by the Murdoch family’s News Corp.

The latest quarterly and half-year filing with the SEC by News reveals that the AU$988 million shareholder loan to Foxtel by News and Telstra has been restructured and settled, and not a dollar changes hands. That loan was part of the takeover of regional pay TV business Austar back in 2012 (which gave Foxtel a pay TV monopoly in this country, courtesy of the ACCC).

The loan was actually called “subordinated shareholder notes” and originally carried a usurious interest rate of 12% a year, belying the old financial adage that the higher the rate, the higher the risk. (Could anyone seriously see Foxtel defaulting on a loan made to it by its two shareholders? Absurd, as was the rate). Over AU$100 million of interest payments were made to News and Telstra a year as a result of that loan, and in a way that was tax advantageous to the two shareholders.

That rate was cut to 9% two years ago, to help ease the growing strain on Foxtel’s financials and cash flows, and then, in 2015-16, the interest costs were capitalised by oh yFoxtel (with the approval of News and Telstra) as Foxtel encountered close to $150 million in losses from the failed Presto streaming venture with Seven West Media and the write-down of the 13.8% stake in Ten to nothing.

Now, with News and Telstra close to finalising their revamp of Foxtel, the shareholder loan is no longer needed and had to be unwound.

The News Corp filing explains:

The Company’s share of the subordinated shareholder notes was approximately A$481 million ($370 million) as of June 30, 2017. During the three months ended September 30, 2017, Foxtel’s shareholders made pro-rata capital contributions to Foxtel by way of promissory notes. The Company’s share of the capital contributions was A$494 million ($388 million) at September 28, 2017, and the Company’s investment in Foxtel increased by this amount. Foxtel utilized the shareholders’ capital contributions to repay its subordinated shareholder notes and interest accrued in the three months ended September 30, 2017. As a result, such notes were considered to be repaid as of September 30, 2017.

That is why it is called financial engineering! The money owing on the loan was simply converted into capital in Foxtel and the value of News’ stake in the pay TV giant rose to US$1.61 billion from US$1.21 billion.

The News Corp accounts also underline why the Fox Sports deal is being done and the size of the task ahead for new CEO, Patrick Delaney who will have Siobhan McKenna, his mentor, and Lachlan Murdoch’s sidekick, looking over his shoulder, and offering her sage advice. The accounts reveal no growth in subscriber numbers, still stuck at “approximately 2.8 million as of December 31, 2017, which was lower than the prior year, primarily due to the shutdown of Presto”. ARPU — Average Revenue Per User, the key measure of income efficiency in subscription TV — fell 2% in the second quarter. That is falling because Foxtel is being forced to offer cheaper packages to would-be subscribers, and to people wanting to use its Foxtel Now streaming service.

In US dollar terms, Foxtel’s revenues were US$1.23 billion for the six months ending December 31, 2017, an increase of US$11 million, or 1%, as compared to revenues of US$1.22 billion for the corresponding period of fiscal 2017. But as with News Corp’s Australian newspaper revenues, favourable currency movements made that performance look better, though they couldn’t hide the slide in operating income (we would call it pre-tax earnings): “Operating income decreased to $US120 million from $184 million in the corresponding period of fiscal 2017″.

Net income increased to US$56 million from US$40 million in the corresponding period of fiscal 2017 :mainly due to the absence of losses associated with Foxtel management’s decision to cease Presto operations in January 2017, the absence of losses associated with the change in the fair value of Foxtel’s investment in Ten Network Holdings and lower interest expense, partially offset by the lower operating income discussed above.”

Peter Fray

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