The more things change, the more things remain the same for ownership of Australian media assets. Change epicenter, this time around, is Disney’s completed $71bn acquisition of Rupert Murdoch’s entertainment business, 21st Century Fox – a deal which unites franchises including Cinderella, The Simpsons and Star Wars under one, in a media behemoth of unprecedented scale.
Fox’s other properties, including its news and sports businesses, have been spun off into the newly formed and very cashed up Fox Corporation – with strong Murdoch connections in the form of both Rupert and his eldest son Lachlan – FOX CEO.
Fox will be looking to expand aggressively. The “New Fox”, highlights the Murdoch family’s view of a future in which television networks return to content that is live and urgent and immune to on demand entertainment revolution started by Netflix. Fox still has prime time entertainment obligations to fill but now primarily as a buyer rather than a producer. Fox generates through affiliate fees more than $US1.7 billion and in 2019 it will book in ad revenue of more than one billion dollars.
Australia, the spiritual home for Murdoch media assets, is certainly in Fox target cross hairs. The local market is deregulated for media cross ownership, and after a failed tilt at Channel Ten, now owned by rival US media behemoth CBS, the logical Fox/Murdoch acquisition is Seven West Media (SWM).
SWM is suffering a protracted annus horrilibus. It has been carrying too much debt and like its main competitor, the listed Nine/Fairfax group has suffered declining advertising revenues.
SWM’s share price is bumping along a historically low 49 cents which on fundamental valuation of a P/E less than 6 times either makes it a bargain or a value trap. (Forecast EPS is 10 cents for FY19). The company’s market cap has shrunk to $784 million. Being in free to air TV has been likened by some industry observers to death by a thousand cuts. The only remedy, which isn’t easy, is cutting costs, and maintaining a focus on winning the revenue share game. Seven delivered ratings share of 38.4%, up 2% in the previous December half due to a new entertainment schedule and the cricket.
Green shoots in advertising revenue and potential takeover activity in the stock make SWM a compelling buy at this price. With a minimum price target 60 cents in the next 12 months.
SWM’s share price was recently almost $1.20 while the Channel Ten kerfuffle was resolving. SWM was a fall back position for Murdoch, the market reasoned. Although this never occurred, there were suggestions talks had occurred between the two parties. And comments from Seven Group Holdings CEO Ryan Stokes that SWM’s parent group is not necessarily eternally wedded to any asset led to a conclusion Seven Group could sell, at some point, its 41% holding at the right price.
It makes a great deal of sense for the local Fox assets (think sport content) to blend with SWM. And ownership of a major TV network in Australia has always eluded Rupert, the elder. The merge between 9 and Fairfax has demonstrated synergy benefits- a reasonable blueprint to expect a SWM/ Fox/News Corp tie up to follow . So what is a takeover price for SWM? My back of the envelope estimate, based on an advertising revenue pick up, is something between $1.20 and $1.50.
Particularly if SWM soon starts paying dividends again. Whether a price of $1.50 is enough to flush out Seven Group remains to be seen. Minority shareholders could choose to sell, potentially leaving Seven Group in a private marriage with Fox.
Seven West net debt stands at $589 million at December 31, and is 2.3 times net debt/ EBITDA. The company is not presently paying any dividends and aims to get its net debt ratio down to below 2x by June 2019. The ability to repay dividends depends on forward earnings and debt leverage probably means dividends won’t be reinstated till FY20 when the ratio gets closer to 1.5x.
Seven is expecting a modest improvement in advertising revenue in the 2H19, offsetting losses in the first half. Increased ad spending by political parties in the lead up to Federal and State elections (please shoot me rather than show me more Clive Palmer ads) is providing some relief. And industry expectation is major parties will try and throw the kitchen sink at Free to Air, if polling shows a narrowing margin between the Federal Government and the Opposition.
Another revenue driver is major banks embarking on credibility rebuilding advertising strategies, post the Hayne Royal Commission. And banks will need to keep this spend up in very competitive lending environment. Interestingly the furore around social media with Facebook, Amazon and privacy settings has prompted some large FMCG (fast moving consumer goods) advertisers to re-engage further with Free to air. Social media is providing audience differentiation, but the not mass market appeal needed by large FMCG’s like toothpaste and cereal makers.
SWM’s forecast EBIT for FY19 is around $240 million. And on current numbers market analysts are factoring in little growth for FY 20. Which I think is the bearish case. Even though the outlook for the Australian economy doesn’t appear brilliant for the next 18 months, the old saying is when the going gets tough, the tough get going, applies to FTA advertiser’s trying to get maximum reach for every dollar spent. A positive increase in FTA ad markets could quickly see leverage re-establish itself in SWM share price, with the added optionality of the Murdoch takeover option.
It’s a bit like buying straw hats in winter!
By Kim Slater