Struggling Seven West Media (SWM) is going to use paper to take over its regional TV affiliate Prime Media Group for around $70 million. At the same time it will raise around $25 million in cash by selling its West Australian radio interests to Southern Cross Austereo.
The nature of the transactions tells us everything we need to know about the weak health of Kerry Stokes’ ailing media arm: it has to limit its cash outflows and maximise cash coming in as it pays down more than half-a-billion dollars of debt to its banks.
So buying Prime will use Seven’s highly devalued shares, and selling the radio stations will maximise cash inflow. It is the classic hallmark of a company under considerable financial strain. It really should be looking to shareholders to finance a new share issue to raise more capital to be used to cut debt. But they have been badly burnt by the collapse in the company’s share price in the past year. Both deals are a form of papier-mache finance — one gust of wind and the whole lot could fall over.
The takeover of Prime is an all-share offer — Seven can’t afford to use its falling cash reserves ($94 million at the end of June) to pay around $70 million in cash for Prime. Instead it has been forced to use its shares (which the market reckons are not worth very much at all, seeing their value has slumped by more than 57% in the past year) and is offering the skinny terms of 0.4582 of a Seven West share (38 cents on Thursday).
That values Prime shares at 17.41 cents each which is under the 18 cents the shares closed at on Thursday (which was a fall of 2.7%). WIN owner and Ten affiliate Bruce Gordon indirectly owns 11% of Prime and he will end up with a small stake in the merged company.
The sale of its WA radio stations to Southern Cross for $25 million also doesn’t mean very much (except Seven getting cash to pay down its bank debt), especially for Southern Cross (the irony of Nine’s regional affiliate helping bail out troubled rival, Seven, hasn’t been lost on the rest of the shrinking industry). Southern Cross this week revealed its revenue for July and August for both its radio and regional TV business had fallen a startling 8.5%. The same day, Commercial Radio Australia said radio revenues in the September quarter had fallen 10.2%, with the biggest fall in Perth at 15.9%.
Southern Cross — whose shares are down 24% this week alone — will be going deeper into an industry in which revenue is falling precipitously. That sounds like another recipe for financial disaster.
And there’s a third deal looming: the sale of SWM’s Pacific magazines business to rival Bauer (which is playing hardball) for up to $40 million. No matter how Seven spins it, the three deals are merely more deck-chair shuffling of the Kerry Stokes’ Titanic. They do not address the company’s central problems: over half-a-billion in debt, falling revenues and profits, and audience ratings heading south. Why these deals couldn’t have been done earlier at higher prices under former CEO Tim Worner and the old board is still a major question.
Right now, it all looks like a clearance sale at Best & Less.