Show business

by David Taylor

There’s been so much going on in the world recently it would have been easy to miss the financial dramas being played out amongst Australia’s leading television broadcasters. Since the global financial crisis, consumer confidence has been noticeable low. That’s affecting the enthusiasm of advertisers and is providing serious headwinds for broadcasters reliant on that advertising. There’s a lot of illusion and make-believe in the world of television, but what’s taking place right now is very real.

In the early 1990s Network Ten was in financial distress. It went into receivership. After an enormous amount of effort, management turned the company around and it was reborn. Now, the Nine Network is facing a similar situation. The company has just a few days before it could be forced into administration.

Here’s the problem. When James Packer decided to exit Nine in 2006, he sold the company to a private equity firm, CVC. Analysts argue CVC paid too much for the media business (which included the television station as well as magazines and some online assets). CVC also inherited a lot of debt in the transaction and even more debt has since been created – now a cool $3.3 billion. Over the past few years the downturn in the advertising market has led to a rather awkward situation for Nine… the revenue coming in from advertising is not enough to meet the ongoing debt repayments. That’s a little simplistic but it’s essentially what’s going on.

Naturally, the big hedge funds that lent Nine money in the first place are getting nervous they won’t receive their money back so there have been several meetings between Nine and its lenders over the past couple of weeks. At the negotiating table are the two what’s called ‘senior’ debt holders: Apollo Global Management and Oaktree Capital. Combined they’re owed $2.3 billion. Then there’s what’s called the ‘mezzanine’ debt holders. They’re ranked lower on the list than the senior debt holders in terms of their ability to get their money back in the event of a liquidation. In this case, debt at the mezzanine level was issued by Goldman Sachs and its owed $975 million. Finally, there’s CVC and Nine Entertainment (Nine).

As it stands, Goldman Sachs has agreed with Nine that it should swap its debt for a 7.5 per cent equity stake in Nine Entertainment and be offered warrants to the tune of $150 million. The problem is that the senior debt holders (the two hedge funds mentioned above) also have to agree with this. They argue, however, that Goldman Sachs’ stake in Nine Entertainment is now worthless and Goldmans shouldn’t be entitled to anything. That’s led to a stalemate.

If the stakeholders can’t agree on who gets what, Nine Entertainment will be forced to call in the administrators. In that event, CVC would walk away with nothing (there equity stake is now worthless), Goldman Sachs would likely leave with nothing, and the two senior debt holders would take a big haircut on their investment. Right now though the senior debt holders are probably trying to work out which way they lose more: by calling in the administrators, or allowing Goldman Sachs to eat some of the Nine carcass as well. My understanding is that they’d likely lose more in the latter scenario, which is why Goldman Sachs is finding it so hard to strike a deal in the 11thhour. If a hungry buyer is ready and waiting though, Goldman Sachs may have a shot.

I should be careful with the word carcass though because Nine Entertainment is a long way from being dead. This is the trickery of the administration cycle. The process is reliant on the debt holders taking a loss on their investment. And in many cases a company will be broken up and sold off to ensure that its creditors are able to get as much back from their investment as possible. In this case though, Nine Entertainment is actually starting to look like a pretty good business. It’s in an unusual position - it can’t earn money fast enough to pay back its debts, but it’s still generating pretty decent cash flows, so it’s likely to stay as it is. It’s just being dogged by its financing history.

In any event, the most likely outcome is that the two senior debt holders will walk away with as much of the business as they can. Between now and then though, Nine Entertainment will be either in the hands of the administrators or a new buyer.

The natural response from the public is that if Nine goes into administration then the company will cease to operate, but that’s simply not the case. It comes down to the very heart of the concept of finance. Businesses can be bought and sold. Investors can take losses on their investments or make a profit. The reality is that debt repayments can catch up on you and swamp your cash flow. If, however, the underlying business still has potential, someone will always come in to buy it on the ‘cheap’. Either way, the show must go on.

Nine is certainly no stranger to the concept of being man-handled. In the mid-1980s, Kerry Packer sold Nine to Alan Bond for $1 billion. He then famously bought is back from Bond a few years later for half that price.

The Ten Network also deserves a mention. It’s not trouble free. It decided to raise $200 million dollars earlier this year to strengthen its balance sheet. Ten, unlike Nine, is being squeezed from both sides. Not only is it struggling to refinance, but it has, on occasion, performed quite poorly in the ratings race this year.

The global finance crisis continues to influence businesses all over the world. Its effect on Australia’s media has been quite profound. What it has highlighted though is just how vulnerable some businesses have become to a downturn in the business cycle. It must be remembered that management has a hugely important role to play in running a successful business. It’s not just about producing a good product, you also have know how to handle change and growth. As the saying goes, you find out who’s been swimming naked when the tide goes out. Then again, isn’t getting exposure what the media business is all about?

David Taylor


The content in my blog is non advisory, please do not interpret this as advice in any way shape or form. These are just my thoughts and nothing I say should be acted upon.

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