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If Nine Entertainment Co was judged on the management of its core business, it shouldn’t be in the trouble it’s in.
That’s the view of veteran media analyst and Fairfax board nominee Peter Cox, who says the problem lies with private equity operators who paid far too much for the company, and subsequently loaded it up with too much debt.
When it comes to bringing audiences and advertisers together, Nine has had solid, if not market-leading performances. Regardless, for the past few days, Nine’s management and lenders have been locked in protracted negotiations about what to do with the company, which owes its lenders $3.9 billion.
The high-stakes talks could see the television channel placed into receivership, or its lenders being given equity in the company.
Goldman Sachs, which owns $1 billion of second-tier Nine debt, has agreed to accept a 7.5% equity stake in the company, arguing the company is worth more than its debt. But major debt holders Apollo Capital and Oaktree Global Management, who own 80% of the debt, are pushing to receive 100% of the company, arguing their debt is worth more than the value of the Nine network, making Goldman’s second-tier debt worthless.
How did Nine get to this point? The story began five years ago, when private equity firm CVC Asia Pacific bought 75% of the company from James Packer (in two segments) for more than $4 billion. At the time many people, including Cox, doubted whether Channel Nine could be worth the value CVC placed on it.
In 2008, he wrote in Business Spectator that the situation reminded him of 1989, when both the Seven and Ten networks were close to collapse and were bought by high-flying Australian entrepreneurs looking for a good deal.
“In both cases the previous period had been one of high revenue growth,” Cox wrote. “Each time, inexperienced but highly ambitious operators paid far too much, overloaded with debt and unrealistic business models. Bond, Skase and Lowy all crashed and Kerry Packer had the biggest win of his life.”
Cox told LeadingCompany today he hasn’t changed his views. The whole of the Nine network is now being valued by its lenders at $1.6 billion at best, and it is still 99.3% owned by CVC.
CVC's managing director, Adrian MacKenzie, yesterday resigned from Nine’s board. A statement from Red Earth Holdings, the holding company of the CVC investment, said MacKenzie removed himself so it could be clear the Nine board would be free to act independently in coming to a settlement with its debt holders.
Nine's ratings are fine
Nine's ratings aren't the source of its problems.
This year, Nine hasn’t been short of revenue-generating television hits. The Voice regularly led ratings on its night. Nine snagged the Olympics – never bad for viewership – and home-grown dramas such as House Husbands haven’t disappointed.
In overall ratings, Seven leads the market. But, Nine argues, in the important 18-49 demographic, it’s ahead.
The advertisers aren’t buying that. Nine hasn’t been able to command the same rates for advertising that rival and market-leader Seven has. “Seven has had a few runs on the board for the past few years,” Cox explains. “And can command a premium for being number one.”
In 2011, Nine made $1.9 billion in revenues, which included contributions from its television, ticketing and magazine division, the last of which was recently sold to a German publisher for $525 million a month ago. The company is due to release this year’s annual report in the next few days.
So much debt, so little time
What’s brought the debt situation to a head is the inability of Nine to cover the $2.9 billion portion of its debt that must be repaid or refinanced in February next year. “That’s what’s brought about the immediate situation,” says Cox. “But overall, the debt-holders have been agitating for the past year to get CVC out as an equity holder and swap their debt for equity.
“They had been treading water on this argument for the last six months, until recently. But to get major financing organised before February, they have to do it in advance. The clock was ticking.”
If the debt isn’t taken care of by February, the directors could be liable for trading while the company is insolvent.
This situation was foreseeable, says Cox. “In the short term, nothing has changed,” he says.
“What we have seen is a cyclical financial situation, where the revenue has been suffering in the whole media industry, in television and newspapers. We get that about once every 10 years in my experience. Some businesses can survive.”
Cox says both Seven and Nine suffer from too much debt, but Seven has been able to better this manage, both through how it arranged its finances and by its better ratings performance, even though its share price has suffered recently.
The standoff and the future
Like many high-stakes negotiations, there are risks for all parties.
If Nine is placed into receivership, Cox says, many of its contracts will be broken. This means its venue arrangements (through Ticketek, the event ticketing company it owns) and many of its programs could be up for grabs by rivals.
But Apollo and Oaktree argue if Nine is placed into receivership, its contracts could still be honoured.
The latest offer, which would see Goldman Sachs owning 7.5% of the company and the hedge funds owning the rest, is a compromise. Goldman originally wanted 30%, but has agreed to the lower offer on fears it will get nothing. The hedge funds still want the whole lot. It’s now up to them to “go back to their people” and see if they can accept the latest offer.
The compromise may be seen as reasonable, but Cox says some of the debt holders may prefer to simply write the whole thing off. Others might want to stick it out and see if they can get some value out of their debt.
Ultimately, if Nine isn’t placed into receivership, coming out of this ordeal with less debt bodes well for its future.
“All media is in a very difficult and challenging world at the moment,” Cox says. “The challenge coming from online will affect television, especially as the NBN leads to more on-demand and streaming services. Television will be under threat.
“When you’re looking forward as a television company, I would presume they would want to have as little debt as possible for the future. The less debt, the more protection.”