Forget all the talk from Seven West Media about how it is transforming itself. Focus instead on details buried in its profit report and annual accounts released on Tuesday.
When you do, you’ll realise the country’s number two free-to-air TV group is a zombie business sliding to irrelevance as the legacy media sector faces another year of weak revenues and fickle viewers.
The accounts reveal that for all intents and purposes it isn’t controlled by its 40% owner Kerry Stokes’ Seven Group Holdings, or other shareholders, but by its banks led by ANZ.
The banks have given it 16 months (until the end of 2021) of easier financial restrictions on the debt to allow it to repair its broken finances and also time for some improvement in the weak TV ad revenue market.
In return the banks have ensured they don’t lose out. They’re charging Seven West a whacking great interest margin of 4.5% on top of the 2% interest rate it already pays (according to its 2020 annual report).
That means the new rate will be at least 6.5%, making it a worse credit risk than most Australian home owners with a mortgage (about 2% to 3.5%).
That’s despite Stokes being a billionaire and the dominant shareholder of the wealthy and very profitable Seven Group Holdings, which holds the 40% stake in Seven West Media.
Gross debt rose by more than 20%
The accounts reveal that Seven West Media took advantage of the banks’ generosity and boosted its borrowings in 2019-20, a gross debt rise of more than 20% — $749 million — in the year to June 27 (which is more than the $716 million two years earlier) and up from $653.8 million at the end of June 2019.
Despite that $95 million rise, Seven said it had cut its net debt to $398 million at the end of June, but only because it held a massive $352 million in cash on its balance sheet the same day, thereby diverting attention from the surge in gross debt.
The reduction didn’t last as a presentation to investors revealed that net debt had risen to $481 million (a jump of 20% in a month) by the end of July because of the need to make working capital payments.
An absurd cash position
The absurdity of that cash position is shown by the fact that it was more than twice the company’s sharemarket value and a quarter of the year’s total revenue — impossible, temporary and a representation of the financial position of the company on June 27 alone and no other day.
The annual report and the separate presentation to investors reveal the deals negotiated about its new “debt facilities ensuring liquidity, flexibility & certainty”.
These include deferring a $450 million payment to July 2022 (a balloon payment). There are new relaxed debt covenants (restrictions) “minimum liquidity and earnings before interest, tax, depreciation and amortisation or EBITDA until the next of 2021″.
From January to July 2022, the old tougher covenants will apply.
If they applied today Seven would not be able to meet them and would be under immense financial pressure, and needing a quick capital injection. It has in fact been in that position for the past three years — no one but the banks have been willing to help.
Payment times three
The banks haven’t been generous though. Deferring the $450 million repayment and easier debt restrictions will mean Seven pays three times more for its money.
The 2019-20 accounts reveal (on page 105) that Seven’s debt cost it 2% in the year to June 27.
The new deal with the banks carries a margin of 4.5% and upfront fees and charges (the costs of putting the new deal together which look like they have to be paid and not capitalised and added to the debt). In the current weak business climate, the 6.5% plus cost is onerous.
Seven West’s true financial position is found at the bottom of the balance sheet on page 75 of the annual report issued on Tuesday, along with the results that show it had accumulated losses of more than $3.6 billion at the end of 2019-20, up from $3.49 billion a year ago.
Total equity has been restated to a negative $236 million at June 27, up from a negative $87 million a year ago. Both figures are a testimony of Stokes’ folly in thinking he could create a big media company to give him dominance in his home town of Perth (and nationally) and not keep it alive.
Even though it has renegotiated its debt deal with its banks, they control the company unless Stokes puts up more capital.
Investors were quick to spot that and other questions and the shares, which had jumped 29% in five days without a query from the ASX, quickly fell and ended the day at 13 cents, down 16%.
It is very hard to favourably spin a 14% drop in revenue and another year of write-downs, more losses, weak ratings, poor programs, one-off cost cuts (a 20% chop in staff numbers to their lowest level since 2003), and little confidence of a significant improvement in the coming year.
And finally, dividends remain an interesting historic relic at Seven West and will stay that way in 2020-21 which will be the fourth year in a row of no rewards for shareholders, including Stokes and Seven Group Holdings.
The last payout was in September 2017 of two cents a share. The shares that month were at 70 cents. They sank to an all-time low of six cents earlier this year.
The 13 cents close on Tuesday might be a more than doubling in the price in a few months but it’s as substantial a rise as the fate of the net debt figure was in Seven’s results on Tuesday — here today, gone tomorrow.