Apollo Global Management LLC (APO:US) and Oaktree Capital Group LLC (OAK:US), the U.S. investment groups taking control of Australia’s second-largest broadcaster through a A$2.3 billion ($2.4 billion) debt-for-equity swap, may have to wait until at least 2014 to exit the business.
Stagnating advertising revenue in Australia will make it difficult for the funds to convince investors to buy shares in Nine Entertainment Co. before then, said Alice Bennett, an analyst at Commonwealth Bank of Australia. Peter Cox, an independent media analyst with Cox Media, estimates an initial public offering may not happen until at least 2015.
“The hedge funds are now the parties at risk in this,” Cox said by phone. “If Nine performs well and the ad industry turns round they would be able to sell into a stronger market, but you’re looking at three to five years for a float.”
Nine’s enterprise value was written down to A$2.3 billion in the deal reached yesterday between senior lenders and so- called mezzanine debt holders, including funds managed by Goldman Sachs Group Inc. (GS:US) That’s about 60 percent less than the A$5.75 billion of debt and equity invested when CVC Capital Partners Ltd. bought the television company from billionaire James Packer’s Publishing & Broadcasting Ltd. in a series of transactions starting in 2006.
Apollo and Oaktree have no immediate plans to sell Nine, said a person with knowledge of the funds’ deliberations. A new board will be appointed, and Nine managers will be given time to implement a plan to gain market share from its Australian rivals, according to the person. Officials at the funds didn’t immediately respond to calls and e-mails seeking comment.
‘One Alan Bond’
Apollo, run by Leon Black, operates private-equity and hedge funds and also makes investments in areas related to real estate, according to its website. Oaktree is the world’s largest distressed-debt investor.
CVC isn’t the first investor to lose money on Nine. James Packer’s father Kerry sold the network to Australian investor Alan Bond in 1987 for A$1 billion, and bought it back for A$250 million when Bond went bankrupt less than three years later.
“You only get one Alan Bond in your lifetime,” Kerry Packer remarked, according to Paul Barry’s 1993 biography “The Rise and Rise of Kerry Packer”.
Sydney-based Nine owns Australia’s second-most watched television channel as well as the country’s largest indoor music venue and Ticketek, an event ticketing company. Its most popular television programs include the Australian version of Big Brother, British motoring show Top Gear, and CBS Corp.’s crime drama the Mentalist.
The debt-for-equity swap wipes out CVC’s original equity investment of about A$2 billion and most of the A$1 billion in mezzanine debt held by funds represented by Goldman Sachs. The senior lenders including Oaktree and Apollo will get 95.5 percent of the new company and mezzanine holders will receive 4.5 percent, Nine said in a statement yesterday.
Some potential buyers have eyed Nine. TPG Capital, the U.S. private equity firm run by David Bonderman, is considering making a bid for the company together with former Metro-Goldwyn- Mayer Inc. Chairman Harry Sloan’s Global Eagle Acquisition Corp., a person with knowledge of the matter said in July.
Offshore phone companies, including Singapore Telecommunications Ltd., BT Group Plc, and Deutsche Telekom AG may also show an interest in the company as a way to diversify away from their slower-growing core businesses, said Jeremy Hook, who helps manage A$250 million as investment director of TMS Capital Pty.
“There’s a logic to owning network and content if you can nut out how it works,” he said by phone from Sydney.
A local trade buyer is less likely, he said. Rupert Murdoch’s News Corp. and Seven West Media Ltd. (SWM), Australia’s most-watched television channel, would likely be blocked by competition regulators given their existing broadcast holdings.
News Corp. will take over pay-television operator Consolidated Media Holdings Ltd. after shareholders, including James Packer and Seven West chairman Kerry Stokes, backed the A$1.94 billion offer with their shares representing about 75 percent of voting rights.
Gina Rinehart, the mining billionaire with stakes in newspaper publisher Fairfax Media Ltd. and third-ranked broadcaster Ten Network Holdings Ltd., is unlikely to see a reason to buy into Nine, Hook said.
“Her purpose is predominantly to leverage a position in media to push a pro-mining, conservative agenda,” he said, “rather than a pure investment-driven logic.”
A mainstream television network such as Nine is less suited to that objective than a newspaper publisher such as Fairfax, which has more political influence relative to its market value, Hook said.
Mark Bickerton, a Perth-based spokesman for Rinehart’s Hancock Prospecting Pty., didn’t immediately respond to a phone message and e-mail seeking comment.
Any company returning to the stock market would face weak conditions for initial public offerings. Australia’s IPO market has seen just $398 million of offerings since the start of the year according to data compiled by Bloomberg. That compares to $1.16 billion over the same period of last year, the data show.
The A$2.3 billion valuation after the debt restructuring is also higher than equity investors would be willing to pay now, according to Samantha Carleton, an analyst at Credit Suisse Group AG.
“There’s a possibility of Nine coming to market before the advertising market recovers, but in terms of valuation it would be compared to current media companies listed,” Carleton said.
Seven West Media will earn A$468 million before interest, tax, depreciation and amortization in the 12 months through June, according to the average of 14 analyst estimates compiled by Bloomberg. That would value the company’s debt and equity of A$3.38 billion at about 7.2 times its expected earnings on that basis, data compiled by Bloomberg show.
Nine, which told lenders during the restructuring process that it was forecasting A$250 million of Ebitda for the same year, carries a multiple of 9.2 times under yesterday’s deal. That compares with an average of 8.9 times in 17 media takeovers worth more than $1 billion over the past four years, according to data compiled by Bloomberg.
Nine has made efforts to regain the ratings lead it lost to Seven in 2007, winning the rights to broadcast the 2012 London Olympics and paying A$1.02 billion with pay-television company Fox Sports in August for five-year rights to show rugby league matches. Payment of Nine’s first A$30 million funding under the broadcasting agreement was agreed yesterday, Australian Rugby League Commission interim chief executive Shane Mattiske said in an e-mailed statement.
Hits and Misses
Even so, the company’s new owners will wait for a recovery in Australia’s advertising market and the consumer spending that sustains it before selling, Commonwealth Bank’s Bennett said.
“They’ll wait until advertising markets have improved, which we’re forecasting in 2014,” Bennett said. “Nine have done well this year in terms of ratings but they’ve had some big hits and misses. They need to develop a bit more consistency.”
Australia’s households, which never saved more than 5.1 percent of their income in the decade to September 2008, haven’t put aside less than 8.1 percent of earnings since then, a rate more than double that in the U.S. The rising propensity to save has hurt demand for consumer goods.
Advertising bookings in Australia’s metro television market, where Nine has the biggest audience after Seven West, have stagnated over the past five years.
Bookings reached A$1.93 billion in the nine months through September 2007 and averaged A$1.90 billion in the same periods of the five years since, according to research group Standard Media Index. Consumer prices have risen 13 percent over the same period.
Television stocks have slumped as a result. Seven West has fallen 56 percent in the past year. Ten Network declined 61 percent in the same period and hit a record low yesterday after Champ Private Equity said it’s ending plans to buy the broadcaster’s Eye Corp. billboard unit.
Ten posted its first annual loss in three years today as it wrote down the billboard unit. The net loss was A$12.9 million in the 12 months ended Aug. 31 compared with net income of A$14.2 million a year earlier, the Sydney-based company said in a statement.
Investors who soured on the prospects for newspaper publishers as Internet advertising eroded their revenue are growing concerned that the same dynamic is also emerging in television, said Simon Cox UBS AG’s Sydney-based head of equity capital markets.
“Investors would traditionally wait until there’s clear signs of an upswing in the ad market but there’s ongoing nervousness about the structural changes affecting all media companies,” he said. “The impact on print media is now obvious and they may seek to extrapolate that to TV.”
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