An initial thumbs down from the market to Kerry Stokes’ plan to back his Westrac business into the Seven Network and grab a controlling stake in the combined group.
Seven shares at first rose 10c on the news of Mr Stokes’ plan, they then sold off over the rest of the day, hitting a day’s low of $6.80, before closing off 5.1% at $6.98.
The shares fell by more than 7% at one stage as investors assessed the deal as being very kind to Mr Stokes, and perhaps not to Seven network shareholders.
They didn’t appreciate the fact that Mr Stokes would be tightening his hold on the Seven Network, and positioning himself for further expansion in the next couple of years, at the expense of Seven network’s $1 billion-plus cash pile.
Investors remember how Mr Stokes snuck up through the Seven register to control it by using the creeping acquisition method of just under 3% every six months.
That way he paid no premium to other shareholders for control.
He has then boosted his holding in Seven through the company running share buybacks and allowing his stake to rise.
He has done one ‘creep’ at West Australian Newspapers to boost his stake to 22%.
By creeping, he avoids (as do others who use the method, such as James Packer and Mr Stokes in Consolidated Media) having to launch an offer once he goes over 20%.
The Westrac equipment sales and distribution business in China and Australia that will be merged into Seven Network Ltd, in exchange for a controlling interest in the expanded group, is unknown, and some $600 million of Seven’s cash pile is going to repay a loan held by Westrac.
The proposal is an attempt to show the cash will not be wasted, but is being used to inject quality assets, earnings and cashflow into Seven Network.
Part of the rationale for the deal was investor concerns that Seven Network might waste the cash pile (and the hundreds of millions of dollars in listed shares) gained from selling Seven Media Group into a joint venture with private equity group KKR.
The Westrac assets, cash flow and earnings will make Seven a much more formidable company in Australia, but there are doubts about valuations and just who benefits most: Mr Stokes, or the current majority shareholders of Seven Network who will become a minority in the new company.
Westrac has gone as far as it can here and would face ACCC problems; Seven would fancy its chances of snapping up a Pay TV asset, ACCC permission willing.
When complete early next year, the new company will have the financial strength to launch a bid for media groups such as Consolidated Media, Austar, or half of Foxtel if Telstra wants to sell.
Mr Stokes told a Sydney briefing yesterday that the combined balance sheet of Seven Network and Westrac would allow the new company to "do anything it wanted to" in the media.
Mr Stokes said the company was keen on CMJ (Consolidated Media) and hoped to expand that.
And Peter Gammell, Mr Stokes’ private CEO and the man who will run merged company, said "we are still keen on the growth prospects of media".
He said "we still think it’s a great business". But Mr Gammell said he had no plans to do anything because of the standstill agreement.
Mr Stokes already owns 48% of Seven Network, which controls 47% of Seven Media Group (with executives holding around 3%).
In exchange for backing Westrac and its $2 billion a year of sales into Seven, Mr Stokes and his family interests will emerge with a controlling 68%, a statement to the ASX explained.
In effect he is giving up 100% control of Westrac and defacto control over Seven, for control of the merged companies, with minorities accounting for around 32%.
Seven justified okaying the Westrac deal with this comment in the release:
"The Seven Directors have conducted a comprehensive review of potential media and telecommunications segment transaction opportunities for Seven and have concluded that the value-enhancing opportunities are limited.
"The Independent Directors believe that the merger will alleviate market concerns related to re-investment risks, and will reduce or eliminate the value discount currently applied to Seven’s share price.
"The transaction substantially repositions Seven from an investment holding company to part of a diversified operating group owning market leading businesses with attractive growth outlooks, while retaining full upside to existing strategic investments.
"The merger provides access to assets that underpin a long term growth profile via exposure to Australian resources and the Chinese economy," the independent directors of Seven Network said in their statement.
The only possible media deals Seven could do would be to take over all of West Australian Newspapers. Mr Stokes would be reluctant to do that because he already has effective control via a 23.4% stake and two board seats.
Seven has 22% of Consolidated Media, but can’t do anything because of a standstill agreement with James Packer until later this year.
That gives Seven time to complete this deal, bed it down and then look for new targets.
The joint company will have borrowings of just over $1 billion, with all but $40 million of that being debt from Westrac.
But Seven Network Ltd has just over $1 billion of cash in its balance sheet and around $600 million of that will be used to repay some debt in Westrac.
This doesn’t take into account the $3 billion or so of debt in Seven Med
