TEN’s biggest hit this year was not The Bachelorette or The Biggest Loser, but the potentially game-changing addition of Foxtel as a new shareholder to the ranks.
The past few years have seen a who’s-who of corporate cavaliers riding into town with cash bonanzas aplenty but little real effect on reviving TEN’s parlous financial and operating position.
The programming cupboard has been bare for some considerable time and the channel has subsisted on a diet of low-rent reality TV, a deficiency of premium sport and a confused identity affliction about who its target audience should be.
Audience share dwindled alarmingly but there seemed little else to do other than pray for a miracle show and hope that advertisers continued to support the network as a foil against networks Nine and Seven.
But a couple of things have happened that has staved off the undertakers and seemingly got TEN out of intensive care and into an early state of rehabilitation.
First, the company put experienced executive Hamish McLennan into the CEO role to oversee the triage. He’s done a credible job and has been handsomely rewarded for it though his Loan Funded Shares (about 25 million of them) will only vest over the next few years at higher share prices. The performance factors that need to be achieved in order for the shares to vest are yet to be determined, so watch out if the Board Remuneration Committee sneaks through a re-pricing or a low hurdle.
Mr McLennan has of course now handed the CEO reigns to Paul Anderson who must ensure that TEN doesn’t regain the weight that has been so painstakingly shed. Mr Anderson also has a bucket load of these Loan Funded shares as does his chief programming officer Ms Belinda McGarvey. In all, about 41 million of these loan funded shares are potentially headed into executive pockets subject to these undisclosed performance hurdles.
Don’t worry. The Board isn’t missing out on the expected improvement in performance. The chairman’s job gets a boost to $250,000 a year from $180,000. It would be nice to see Mr David Gordon add to his 247,500 shares as he has been a director of the company since April 2010. The company has accumulated some pretty spectacular losses during that period.
Mr Anderson has only recently become CEO (27 July 2015) but he was the CFO and COO prior to his promotion. The company’s difficulties prevented the key management personnel from achieving all of their short term bonus targets in FY15, but the Board decided their efforts were due a pat on the back and flipped Mr Anderson a $160,000 ex gratia payment anyway.
His fixed annual remuneration begins at a modest $1.25 million rising to $1.45 million then $1.65 million if certain undisclosed cash flow targets are met.
That’s still chicken feed compared to the lolly being handed out at Seven and Nine but the Board states specifically that the CEO’s pay will be compared to similar TV executive roles. Watch this space too. Mr Tim Worner at Network Seven started his tenure as CEO in July 2013 on a lousy $2.6 million pa (plus potentially 50% of the base for each of his short and long term bonus awards). But that’s chicken feed compared to the $3.5 million pa salary Mr David Gyngell was on at the time of the IPO of Nine Entertainment. His pot has been adjusted to a $2 million salary but enhanced by $5 million worth of share rights and a $2 million short term bonus potential.
There can be no argument then, that TEN’s shareholders are a benevolent lot. Notwithstanding that the four largest of them have about 41% of the company, all shareholders have clearly shouldered an ugly burden for several years now.
There’s no interim dividend on the horizon, consistent with the zero dividends paid since FY12.
The second piece of good news was the protracted but ultimately successful deal done to get Foxtel in the door as a 15% shareholder.
This is very good news for TEN as it will potentially give the network a vastly improved catalogue of content to boost its schedule. In particular, I would expect TEN to be able to utilise Foxtel’s extensive sporting rights library, even if much of it is on a delayed or repeat basis.
In addition, the deal has given TEN a 24.99% stake in Foxtel’s grunty advertising machine, Multi-Channel Networks (MCN). The agreement kicked off on 1 September and is already like a shot of morphine into TEN’s financial veins. The company reported that its gross advertising revenue is expected to grow by at least 10% in the first three months of FY16.
The rights entitlement issue of approximately $77 million matches the value of the new shares being issued to Foxtel. In all, the extra $154 million of capital will put TEN in a net cash position of about $15 million as at 31 August 2015 on a pro forma basis.
The proceeds of the capital raising will eliminate all outstanding debt for now meaning an instant boost to the earnings of the company by avoiding interest expenses (FY15 ~$16m).
The Board itself is being remodelled with just six representatives including two independents (one of which is the chairman) and Foxtel will also get a seat. The smaller board is appropriate for a company of this size.
The Foxtel deal on its own won’t suddenly alter TEN’s frog status into a programming princess, but the potential is evident. Little wonder that TEN’s competitors staunchly opposed the deal as it adds a different dimension to the cosy free-to-air club. TEN and MCN represent over $1 billion in broadcast sales revenue, comfortably more than either Seven or Nine.
From Foxtel’s point of view, the timing of the deal is excellent as TEN’s audience ratings are indeed improving (from a very low ebb) and could be handily helped along with a decent nudge from some fresh content. That, along with the muscled-up advertising sales partnership, could add plenty of value to Foxtel as well as TEN.
TEN’s FY15 result was a bit academic in the circumstances. The TV licence impairment of $251.2 million was already known while the movement around programming and other non-selling operating costs was just noise.
Once TEN emerges from its trading halt for the capital raising, it might finally feel like it has reached a turning point. There is still uncertainty around the potential for the government to rid the industry of various antiquated regulations such as the 75% audience reach rule.
There is also uncertainty around what strategy TEN’s largest shareholder, Mr Bruce Gordon, will adopt if and when these rules change. Mr Gordon’s recently acquired (approximately) 15% stake in Nine Entertainment muddies the waters and it remains unclear as to what will become of his WIN Corporation – a key player in regional television markets.
TEN has been through the grinder before and come out the other side. This time feels strangely different given the appealing nature of the Foxtel relationship. I’ve been quite scathing of the situation at TEN and have not hesitated to call it a lemon. But investors with some spare cash might want to take a considered look at this stock in case it turns into a glass of lemonade.